Suppose a 2 year 5% (annual coupon) bonds are selling at par (that is, for $100 of face value, the price is equal to $100) and 1 year zero coupon bonds has a yield to maturity of 7%.

(a) What are the 1-year and 2-year interest rates, r1 and r2, respectively? (b) What should be the price of a two year 8% coupon bond with a face value of $100?

(c) What are the Durations of 5% coupon bonds and 8% coupon bonds? Which one has longer duration? What is the implication about interest rate risk?