Imagine that you are a bond portfolio manager and an investment bank bond salesperson calls you to offer you two bonds. The first bond has a 5-year maturity, a 5% coupon, is priced at ?106.77 and has a 3.50% yield. The second bond has a 10-year maturity, a 7.5% coupon, is priced at ?121.49 and has a 4.75% yield. Both bonds have an annual coupon payment frequency, par values of ?100 and are from the same government issuer.

Calculate the one-year investment return for both bonds using the yield curve data in table 2 on the next page. You can assume that the yield curve does not change over the investment period. Which bond produces the best one-year investment return? Explain your answer clearly and provide observations about the results.

Imagine that you are a bond portfolio manager and an investment bank bond salesperson calls you to offer you two bonds. The first bond has a 5-year maturity, a 5% coupon, is priced at E106.77 and has a 3.50% yield. The second bond has a 10-year maturity, a 7.5% coupon, is priced at E121.49 and has a 4.75% yield. Both bonds have an annual coupon payment frequency, par values of E100 and are from the same government issuer. Calculate the one-year investment return for both bonds using the yield curve data in table 2 on the next page. You can assume that the yield curve does not change over the investment period. Which bond produces the best one-year investment return? Explain your answer clearly and provide observations about the results. Table 2. Bond yields Maturity Yield in years in percent 1 2.50 2 2.75 3.00 4 3.25 3.50 6 3.75 4.00 4.25 4.50 10 4.75