PLEASE ONLY ANSWER (a)

In early January 2010, you purchased $30,000 worth of some high-grade corporate bonds. The bonds carried a coupon of 8 1/8 % and mature in 2024. You paid a price of 94.125 when you bought the bonds. Over the 5 years from 2010 through 2014, the bonds were priced in the market as follows: Year 2010 2011 2012 2013 2014 Quoted prices (% of $1,000 par value) Beginning of the Year End of the Year 94.125 100.625 100.625 102.000 102.000 104.625 104.625 110.125 110.125 121.250 Coupon payments were made on schedule throughout the 5-year period. Required: Find the annual holding period returns for 2010 through 2014. (11 marks) (b) The historical yield spread between AAA bonds and Treasury bonds widened dramatically in 2008. If you believe the spread will soon return to more typical historical levels, what should you do ? This would be an example of what sort of bond swap 2 (5 marks) Prices of long-term bonds are more volatile than prices of short-term bonds. However, yields to maturity of short-term bonds fluctuate more than yields of long-term bonds. How do you reconcile these two empirical observations ? (4 marks) (d) Discuss the components of interest rate risk. Assuming a change in interest rates over time, explain the TWO (2) risks faced by the holder of a bond. (5 marks) [Total: 25 Marks]