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1.Assume there are two bonds that are currently selling at par. Bond A is a $1000, 4-year
bond with a 10 per cent coupon rate (annual payments), and Bond B is a $1000, 3-year
bond with a 5 per cent coupon rate (annual payments). Discuss which bond is likely to
have a lower interest rate risk.
a. Discuss the determinants of the equilibrium rate of interest in the interest rate
quantity diagram. Are they upward sloping or downward sloping? Why is it the case?
b. Using the diagram of the equilibrium rate of interest to discuss the likely movement of
interest rates during COVID-19 period.
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