Consider the following two bonds: a Treasury bill that will pay you $1,000 in 1 year, and a zero-coupon Treasury bond that will pay you $1,000 in 30 years.
a. Calculate the value of each of these bonds today if interest rates are 4%.
b. Suppose interest rates rise to 8%. What will happen to the price of each bond?
c. Suppose you believe that interest rates are due to rise. Where would you prefer to have your life savings invested, Treasury bills or zero-coupon Treasury bonds? Why?