Problem 2 -10 points Five years ago REG Inc. sold $200,000,000 worth of bonds with ten years until maturity. The bonds were sold at par, and carry an annual coupon of 8%. INA Corp. has just sold $180,000,000 worth of bonds to investors, also at par. INA bonds have five years until maturity and carry a coupon rate of 9% with coupons paid semi-annually. Neither the REG nor the INA bonds have any complex features (they are not callable, they are not convertible etc.), their terms (covenants etc.) are the same, and they recently received identical ratings from the major bond rating agencies What is the EAR on REG bonds today? Problem 3-15 points You must invest $100,000 and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to invest the full S100,000- for example it is possible to buy 148.45 of bond C). The same 5% market interest rate (APR, compounded semi-annually) applies to all of these bonds and they have the following additional characteristics A. 8 years to maturity and 5% coupon rate (coupons paid annually) B. 3 years to maturity and 7% coupon rate (coupons paid semi-annually) C. 8 years to maturity and 0% coupon rate (discount aka zero-coupon bond) D. 8 years to maturity and 5% coupon rate (coupons paid semi-annually) E. 3 years to maturity and 5% coupon rate (coupons paid semi-annually) (a) Rank these bonds according to their interest rate sensitivities, from the most interest rate sensitive to the least interest rate sensitive (no calulations needed but you need to provide brief explanations for you rankings) (b) If you are worried that market interest rates might increase unexpectedly, which bond should you purchase? (c) If you want to profit from an unexpected decrease in market interest rates, which bond should you purchase? (Note: assume your research leads you to conclude that interest rates will decline, but you have not shared this information with anyone - i.e. the decline is unexpected for everyone else)