Augustus bought a 3-year 15% Treasury bond on 8 May 2020 at a yield of j2 = 18.6% p.a. Coupons can be reinvested at j2 = 14.0% p.a. The bond will be redeemed at par on the maturity date (face value $100).

a. Calculate the total accumulated value at maturity generated by this bond if Augustus holds it to maturity and reinvests all coupon payments received at the available rate.

b. Calculate the total realised compound yield (TRCY) of this bond.

c. Decompose the total accumulated value generated by this bond into: original purchase price, coupons, interest on coupons, and capital gain/loss.

d. If Augustus holds the bond for 2 years and sells it for a yield of j₂ = 18.8% p.a., calculate the holding period yield (HPY).

e. Calculate duration of this bond if it is held to maturity.

f. Use the concept of modified duration to estimate the price of the bond if the yield to maturity increases to j2 = 18.7% p.a. immediately after Augustus buys the bond.

g. What fixed liability could Augustus be reasonably confident of paying off in 2 1/2 years' time? Why?