You are considering making an investment for the extra money that you have for the next year. There are only two possible options: 1) Buy a 4 year bond (A) that pays 5% coupon and sell it in 1 year. 2) Buy a 10-year bond (B) that pays 5% coupon and sell it in 1 year. Assume that both bonds are purchased at the price of $1,000, which is equal to its face value.

With an equal chance (50%) the market interest rate can be either 3% or 7% at the time of sales. Calculate the price of each bond when the interest rate is 3% and 7%, respectively.

Calculate the rate of return of each bond (assuming that you purchased this bond at $1000) when the interest rate is 3% and 7%.

Calculate the risk of each bond.