James purchases a five-year government bond which makes annual coupon payments of 5% and offers a yield of 3% annually compounded. The face value of this government bond is $1000. Suppose one year later the bond yields drops to 2%, James decides to sell the bond in the market.

1. What is the price of this five-year government bond when it is issued? (4 marks)
2. What is the price of this bond one year later? (4 marks)

c) What return will James earn for this 12-month investment? (4 marks)