Question 1 Assuming that you are buying two different coupon bonds: Alpha and Beta with following conditions: 0 Alpha: face value (par value) = $1000 coupon rate: 10% years to maturity= 5 yield's to maturity (interest rate) = 10% the current price of Alpha bond, PG=? 0 Beta: face value (par value): $1000 coupon rate=10% years to maturity= 3 yield's to maturity (iterest rate): 10% the current price of Beta bond, 135:? a- What are the prices of Alpha and Beta bonds? b- Now assume that at the beginning of the second year the interest rate in the nancial market increases to 20%. What will be the new price of each bond? What would be the prices of these bonds if at the interest mte was the same as 10%? (Note: Now, the years to maturity for Alpha is 4 years, and for the Beta is 2 years.) c- What are your conclusions from part b d- Calculate the rate of return for each bond between the rst year (t) and the second year (t +1) when interest rate increases to 20%? e- What is the rate of capital gain/ loss of each bond? f- If the interest rate declines, which would you rather be holding, the longterm bond (Alpha) or shortterm bond (Beta)? Why? Which type of bond has the greater interestrate risk