You are currently looking at two $ denominated bonds: Bond 1: 5 year, 6% coupon , face value $1 million, yield to maturity 6%. Bond 2: 5 years 4% coupon , Face value $1 million, yield to maturity 4%.

a) Following the recent drop of interest rates by 1.5%, how would the prices of these two bonds change? (10%) b) Explain what accounts for the difference in price changes of these two bonds ? (5%) c) If you want to add one of these two bonds to your existing portfolio, and at the same time you want to reduce your systematic risk , which bond would you choose and why? (10%)