Suppose that in June 2020 you are considering buying a UK government bond with 1,000 face value, 5% coupon rate and maturity in June 2026. What should be a fair price of this bond if, in June 2020, other medium-term UK government bonds offered a return of about 4%.Support your answer with appropriate calculation and clearly state any assumptions you made.

ii) Explain how your answer to part (i) would change, if you were told that most market participants are expecting an increase in general level of interest rates (i.e. an upward sloping term structure of interest) rates.