Q2:

A saver goes to a bond trader on 1 January and purchases a bond of face value $100,000 with time to maturity 2 years and which pays a coupon of $10,000 on 31 December on each of the two years. The current market interest rate (the average yield on the collective portfolio and thus the opportunity cost of holding the bond) is 5% per year.

a) Write the equation for the price the saver must pay for the bond in terms of its face value, the coupon payments and its yield.

b) Calculate, showing and briefly explaining your algebraic workings, the price she must pay for the bond and explain its relationship to the "par value" or the face value.

c) Calculate, showing and briefly explaining your algebraic workings, the remaining duration of the bond.