Samantha Loony-Warde, the investment manager of Golden Square Superannuation Management Fund wishes to invest funds for the next 10 years. She is comparing the following two alternative types of bond investment:

The Rabbit bond can be bought today for $79. It pays $15 coupon payments annually and $100 principal when it matures in 10 years time.

The Golden Dragon bond costs $20 today, and pays $100 when it matures in 10 years time. It pays no coupon payments during its life, and is known as a zero-coupon bond.

[Bear in mind that the pension fund wishes to invest for a 10-year term, as it does not need any cash inflow for its members until the end of Year 10.]

Required:

(b) Calculate the return for Golden Dragon Bond? (1 mark)

(d) Once again, suppose that the market rate of interest falls to 10% as soon as the fund invests in the bonds. What actual rate of return will the fund earn over the 10-year term for Golden Dragon Bond? (2 marks)

(e) Does this suggest a greater element of risk in one bond than the other? Why (4 marks)