We are considering two bonds. One pays 3% and has a maturity of 8 years, while the other pays 4% and has a maturity of 8 years. If we expect rates to fall by 1% from their current level, which is 4%, where should we invest.

What is the total rate of return we make for the one versus the other? 

 

In this problem, address the fact that one bond drops by less of a yield than the other. This has implications about the expected profitability of the two instruments?