You are considering buying two bonds (Bond A and Bond B)issued by B&B Inc. Both bonds have15 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%? (4marks)

(c)i)Suppose Bond As YTM is expected to rise to 9%in one year. Compute the bonds current yield, capital gains yield and total yield (i.e., the1-yearholding period yield, HPY1-year). (12marks

)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 (c i) assuming the YTM of Bond B rises to 10% in one year and coupons are reinvested at YTM.(18marks)[Hint: A coupon bonds 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?]

(e)Explain which bond (A or B) has higher interest rate risk.(2marks)[Note: Full mark would only be given to answer of no more than TWO lines.