Assignment 2-2.

There are three bonds on a fixed income market:

1) Bond A is a newly issued classical coupon bond with fixed coupon rate of5.0%, nominal value of 1000 Euros, and maturity period of 5 years (from today). Interests on principal are accrued annually but will be paid on a redemption date.

2) BondBis a perpetual bond. The next coupon payment in amount of 45 Euros will be made in one year; coupon payments will increase by0.40%each year.

3) BondCis a newly issued discount bond with maturity period of 10 years and nominal value of 2000 Euros.

- Find market prices and durations of bonds A, B, and C. Market interest rate is currently4.50%

- EXTRA. Suppose there is a portfolioABCin which the value of each bond equals1/3of a total portfolio value. How will duration of the portfolioABCchange one year from now if market interest rate increases by0.5percentage points by that moment?