Consider a 5-year bond with annual coupon payments. The bond that has a face value

of $100 and sells for $95. The coupon rate is 3%. Coupon rate is the ratio between the

coupon value and the face value. The face value is paid at the maturity year in addition

to the last coupon payment.

1. Calculate the the bond's yield to maturity (YTM). (2 marks)

2. Calculate the bond's duration using its YTM. (2 marks)

3. Suppose the bond's YTM changes in correspondence to 5-year T-bill interest rate.

Use the bond's duration to evaluate the percentage change in the 5-year bond's

value if the interest rate on 5-year T-bills falls by one basis point, that is, by 0.01%.

(2 marks)

Suppose the following xed rate part has be extracted from the balance sheet of the First

Bank of Australia:

Assets (Billion AUD) Liabilities (Billion AUD)

Bond 80 Fixed-rate Liabilities 60

where the xed-rate liabilities has the average duration of 4 years.

4. How does the bank's equity change, if the T-bill interest rate increases by 10 basis

point? (2 marks)