Problem
I. Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :
i. Discuss which bond will trade at a higher price in the market
ii. Discuss what happens to the market price of each bond if the interest rates in the economy go up.
iii. Which bond would have a higher percentage price change if interest rates go up?
iv. Substantiate your argument with numerical examples.
v. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
II. Familiarity with random variables is essential to understand the basics of portfolio theory. Given that CLA2 assignment is about portfolio formation, you need to strengthen your skills in dealing with random variables. Please review and explain the significance of basic concepts about random variables, namely, the mean, the variance, the standard deviation, and the correlation.
The response should include a reference list. Using one-inch margins, Times New Roman 12 pnt font, double-space and APA style of writing and citations.