Answer the questions for bonds A and B and show all your calculations. Coupons are paid semi-annually.

Bond A Bond B

Coupon rate 8% 9%

Yield to maturity 8% 8%

Maturity (years) 2 5

Par $100 $100

a) Calculate the price of bonds A and B. (4 marks)

b) Calculate the new price of the bonds for a 100 basis point increase in interest rates. (4 marks)

c) Calculate the annualized modified duration for each bond. (4 marks)

d) Using the calculated modified duration in part c), estimate the price of the bonds for a 100 basis point interest rate increase. (4 marks)

e) Comment on the accuracy of your results in parts b) and d), and state why one approximation is closer to the actual price than the other. (4 marks)