Question 5 You expect interest rates to rise. The rest of the market thinks that they will remain unchanged over the coming year. In each question, choose the bond that will provide the higher capital loss if you are correct. Briefly explain your answer.

a. (1) A Aa-rated bond with coupon rate 10% and time to maturity 30 years. (2) A Ba-rated bond with coupon rate 10% and time to maturity 30 years.

b. (1) An Aa-rated bond with coupon rate 10% and maturity 20 years, callable at 110 with YTM = 8%. (2) An Aa-rated bond with coupon rate 7% and maturity 20 years, callable at 110 with YTM = 8%.

c. (1) A 6% coupon noncallable T-bond with maturity 10 years and YTM = 8%. (2) A 6% coupon noncallable T-bond with maturity 20 years and YTM = 8%.

d. (1) A zero-coupon bond with maturity 10 years and YTM = 8%. (2) A 6% coupon noncallable T-bond with maturity 10 years and YTM = 8%.