Question 1: Bond Duration and Interest Rate (20 Marks)

A. Suppose you are thinking about investing in some bonds. Your investment advisor presents to you a $1,000 face value 3-year semi-annual bond with 4.5% coupon per annum and a yield to maturity of 6.7%. What are the price and the annualized Macaulay duration of this bond?

B. You are provided another 4.5% annual 7-year bond with a yield to maturity of 3.0% and a Macaulay duration of 6.20 years. If the market yield decreases by 25 basis points, how much change will there be in the bond's price?

C. While you were discussing economic conditions and the bond market, the investment advisor mentions that inflation is expected to increase as a result of Covid-19 situation. State and demonstrate using graphs what will be the impact of this on demand, price and yield for bonds.

Needs to show solutions and preferably done and shown via Microsoft word.