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Given the uncertainty in the stock market, the client wants to invest in bond markets as well. He is interested to invest in one of

Given the uncertainty in the stock market, the client wants to invest in bond markets as well. He is interested to invest in one of the following bonds:

Bond Coupon rate Face value ($) Maturity Market Price($)

A 3.5% 1,000 3 years 1,046.232

B 2.0% 1,000 2 years 1,001.944

a. After doing some market research, you have found the following zerocoupon yields in the market: 1 = 1.0%, 2 = 1.5%, and 3 = 2.0%. If the client is not concerned about interest rate risk, which of the two bonds would you recommend as a good investment? How would your answer change if the client is concerned about interest rate risk? Justify your answer in both cases.(20 marks)

b. The client has observed many other bonds in the market that offer a negative yield-to-maturity. He needs some advice. What do negative interest rates tell us about the time value of money? Should he ever invest in a bond that offers a negative yield?(5 marks)

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