Over the last year the inflation rate was 3.8 percent and the interest rate on US Treasury Bonds was slightly below 2 percent. As an investor in bonds

a. what would you expect to happen to interest rates?

b. using the three bond rules, in terms of prices, maturity, and coupon rates, what type of bonds should an investor purchase? Explain.

c. Which bond is more price sensitive, a zero coupon 20 year to maturity government issued bond or a 5 percent coupon AAA rated 20 year corporate bond? Explain why?

d. Which bond is more price sensitive, a 8 percent coupon bond that matures is 6 years or a 8 percent bond that matures in 4 years? Why?

Note: the concept of a bonds duration allows bonds of different coupons and maturity dates to be compared in terms of price sensitivity.