Question 3. Bond valuation (10 marks) a) Please explain the differences between a par bond, a premium bond and a discount bond? (3 marks); and how does the relationship between coupon rate and yield to maturity impact on whether the bond is trading at a premium or a discount? (2 marks)

b) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? (5 marks)

uestion 3. Bond valuation (10 marks) a) Please explain the differences between a par bond, a premium bond and a discount bond? (3 marks); and how does the relationship between coupon rate and yield to maturity impact on whether the bond is trading at a premium or a discount? (2 marks) b) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction