Question 1 page 2 a) How are coupon bond prices and market interest rates related to each other? Provide a brief intuitive explanation for your argument. Limit your response to a maximum of 100 words. (5 marks) b) Face Hedge Inc. had issued 9% semi-annual coupon bonds. 5 years remain for them to mature. The market interest rate is 7% p.a. i) What is the duration of these bonds? If the market rate of interest falls to 6% p.a., what will be the new price of these bonds? (2.5+ 2.5 = 5 marks) ii) c) You purchase a 15-year, 6% annual coupon bond today. Similar risk investments in the market carry a 7% p.a. interest rate. You plan to sell the bond in one year's time at which time, the market rate is likely to be 6.5% p.a. i) ii) iii) What is your purchase price? What is your likely sale price? What would be your percentage return if everything went as expected? (1 +1 + 3 = 5 marks)