Question 5 (20 Marks) Two firms are each offering investors the opportunity to invest in their corporate bonds. The bonds have 3 years to maturity and are available at par value. The face value of each bond is $1,000 and they pay annual coupon payments. Details are below pon l Price Per annum 6.00% 6.20% Firm A Firm B $1020 (Immediately) Required: a) Suppose that market interest rates decline by 80 basis points (0.8%). Contrast the effect of this decline on the price of each bond. Explain in detail. State all (8 marks) b) Should you prefer Firm A or Firm B bonds when rates are expected to rise or to fall? Explain your choice. State all assumptions. (5 marks) c) How does operating leverage give firms greater sensitivity to business cycles? What is portfolio sector rotation? Give examples of rotation into appropriate industries according to different stages of business cycles. (7 marks)