Problem 2: Comparative duration (30 points)

Assume you are considering the purchase of two $1,000 bonds, both issued by Post Corp. You expect that interest rates will drop, and you want to buy the bond which provides the maximum capital gains potential. The first Post bond has a coupon rate of 6% with five years to maturity, whereas the second has a coupon rate of 9% and comes due six years from now.

If market rates of interest are 8% for both bonds, which bond has the best price potential? (Use duration to answer the question.)