At the end of March 2019, a Zambian corporate bond had a coupon rate of 6%, a par (face) value of K1,000 and will mature in March 2022. Market rates of interest are currently 4.5%.

Required:

A. Using the data given above and assuming semi-annual coupons and a semi-annual discount rate equal to 2.25%, calculate the value of the corporate bond.

B. Calculate the Macaulay duration of the Zambian corporate bond described above assuming annual coupons and discount rate. (7 marks)

C. Explain Macaulay duration and describe the main characteristics of Macaulay duration in relation to bonds. (7 marks)

D. Explain modified duration and explain the limitations of using this measure.