QUESTION 1

(For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.)

a) ABC Ltd issues two different bonds, a 5-year semi-annual coupon bond and a 10-year zero coupon bond with the same yield to maturity. Explain which bond is subject to more interest rate risk. (2 marks)

b) DEF Ltd issues two different bonds, a 5-year coupon bond and a 10-year coupon bond with the same yield to maturity. Explain which bond you would buy if interest rates are expected to drop in the future. (2 marks)

c) Explain the relationship between the yield to maturity of a par bond and its coupon rate. (1 mark)