Question: Consider two 7 per cent $100 government bonds that differ only in date of maturity. One matures in 2 years and the other matures in

Consider two 7 per cent $100 government bonds that differ only in date of maturity. One matures in 2 years and the other matures in 4 years. Both bonds are selling at par and pay annual interest. What will be the price of each bond if the required yield fell to 6.5 % per annum? Explain the relative price movements in response to interest rate changes. [10 marks]

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