Consider the following 3 bonds. Coupons are all paid annually.

Bond A: 8% coupon rate. YTM = 8%.

Bond B: 3% coupon rate. YTM = 8%.

Bond C: 3% coupon rate. YTM = 6%.

(a) Use Excel to compute durations of bond A, B and C with term to maturity of 2 years, 5 years, 10 years and 15 years. Plot durations of bond A and B in one figure. Plot durations of bond B and C in one figure. Briefly illustrate how the duration is influenced by coupon rate and YTM.

(b) Consider the 15-year bond C. Calculate the bonds new prices when the YTM increases and decreases by 0.5%, 1% and 1.5%. Also apply the Duration approxiation method to compute new prices. Plot the difference between the two prices at different YTMs.