You are considering buying two bonds (Bond A and Bond B) issued by B&B Inc. Both bonds have 15 years remaining to maturity, $1,000 par value and carry an 8% coupon. Bond A is an annual coupon-paying bond while Bond B is quarterly coupon-paying bond. (a) Explain, without the calculation of the bond price, whether Bond B is trading at premium, par or discount if its YTM is 8%. [Note: Full mark would only be given to answer of no more than TWO lines.] (2 marks) (b) How much should you pay for Bond A if its YTM is currently 7%? (4 marks) (c) i) Suppose Bond A's YTM is expected to rise to 9% in one year. Compute the bond's current yield, capital gains yield and total yield (i.c., the 1-year holding period yield, HPY 1-year), (12 marks) ii) For Bond A, describe (in NO more than one line) the relationship between current yield, capital gains yield and holding period yield. (2 marks) (d) Re-do part (ci) assuming the YTM of Bond B rises to 10% in one year and coupons are reinvested at YTM (18 marks) [Hint: A coupon bond's total return comes from three sources: coupons, reinvestment of coupons and capital gain. What is the total amount of interest income earned for one year if coupons are "reinvested at YTM"?) (c) Explain which bond (A or B) has higher interest rate risk. (2 marks) [Note: Full mark would only be given to answer of no more than TWO lines.]