1) A twenty year $10,000 bond that pays semi-annual coupons at j2 = 5% is purchased at a price P to yield j2 = 3%. The bond is redeemable at 102.

a) (i) (10 marks) Calculate the Modified duration (MD) of this bond at j2 =3%.

(ii) (2 mark) If interest rates decrease by 0.75%, estimate the change in the bonds market value (price).

b) One year later the bond is trading at a price to yield j2 = 2.0%.

(i) Using the Method of averages (MOA), estimate the investors total return over the one-year period.

(ii) X = |MV BV| of this bond (one year after purchase). Calculate X.

c) The investor that purchased the 20-year bond above is called Investor A. Suppose Investor B purchases a 20 year accumulation bond at j2 = 3% at the same time. If interest rates increase by 1% (from j2 = 3% to j2= 4%,) which investor is better positioned? Justify your answer (note that no calculations are required to answer this question) please show your work!