Consider a bond issued by the Liebowitz Corporation. The bond matures on April 15, 2041, and pays a 5 percent annual coupon, paid semi-annually. Interest accrues following the 30/360 interest accrual convention. Please assume that the par value of the bond is $100. Liebowitz Corporation has an investment-grade credit rating of BBB. Today (the settlement date) is 3/18/2021.

A. Suppose that a reasonable risk-free benchmark interest rate for that bonds cash flows would be 3 percent per year. What would the (clean) price of this bond be if this bond were priced at this risk-free benchmark rate? (5 points)

B. Suppose that the clean price of the bond is 98. What is the yield of this bond? (5 points)

C. What is the implied spread to the risk-free benchmark described above? Please assume that the yield is what you calculated in B) above (2 points)

D. What is the accrued interest and dirty price of this bond right now? Please assume that the yield is what you calculated in B) above. (2 points)

E. What is the Macaulay Duration of the bond? (3 points)

F. What is the Modified Duration of the bond? (3 points)

G. Use this Modified Duration to calculate an approximate measure of the bonds percent price change if the benchmark yield were to rise 0.5% with no change in spreads. Please assume that the starting point is what you calculated in B) above. (3 points)

H. By what exact percent would the bonds price actually change in that scenario? (3 points)

I. Please return now to a scenario where the benchmark yield is 3 percent. Suppose that it is anticipated with perfect certainty that a leveraged-buyout firm will purchase Lee Corporation and use its assets as collateral for much more borrowing, pushing the firms credit rating to B. Spreads for B-rated firms are 5 percent. What precisely would this mean for the price of Lee Bonds? (4 points)

J. Extra credit: what does the answer to I. suggest about what a successful bond investor may wish to have a good model for predicting? What inputs might you propose for such a model? (extra credit)