1. Take a hypothetical US treasury bond with 2 years to maturity and an annual coupon rate of 3%. Coupons are paid semi-annually. Take another US Treasury bond with 3 years to maturity and the same coupon rate. Assume that the Annual Percentage Rate on 6-month deposits in the US is constant at 3%.
a) What are the fair prices of the 2 bonds?
b) If the US interest rate doubled to 6%, which bond would see the largest price change?
c) What is the intuition for the result you found in (b)?