Question 1 (28 marks) The following table lists the detailed information of several corporate bonds. Bond Ratings YTM Bond A 4% 15 years; 6% annual coupon 20 years; 7% annual coupon Bond B 10% Bond C 10 years; 5% annual coupon AA-rated Bond D 10 years; 5% annual coupon B-rated Bond E 30 years; 4% annual coupon (a) What is the effective duration of Bond A for a 100bp change in yield? (12 marks) (b) If you expect the interest rate to drop by 60bp, what is the percentage change in the price of Bond A as estimated by effective duration? (4 marks) (c) Continued with part (b). Will the percentage change in the price of Bond A larger or smaller than that estimated in part (b) if convexity adjustment is made? Briefly explain. (3 marks) (d) If the interest rate rises, will the actual price of Bond B be higher or lower than the estimated price based on duration approximation? (2 marks) (e) Assume Bond C and Bond D are identical except their bond ratings. Without any calculation, determine whether you prefer to buy Bond C or Bond D now if you expect the interest rate to go down in the coming period. Explain briefly. (4 marks) (1) Without any calculation, determine which of the above bonds has the highest duration Explain briefly