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Question 2 . (30%) Consider an 8 percent coupon, 18-year maturity bond where coupons are paid annually and time zero market yield level is 8

Question 2. (30%) Consider an 8 percent coupon, 18-year maturity bond where coupons are paid annually and time zero market yield level is 8 percent.

  1. (8%) Find the possible prices of this bond at the following market yield levels (assuming a flat-term structure) and calculate the (actual) percentage price () change relative to the price ()at 8 percent yield level. In other words fill in the following table.

Yield (%)

Price ($) levels for the 8%, 18-year bond

5

6

7

7.5

8

8.5

9

1,000

10

11

  1. (7%) Plot the price-yield graph of this bond, utilizing information obtained in part a.

(Attach the graph with a title Question 2 Part b)

  1. (8%) Calculate the duration of this bond at the following yield levels. (In other words fill in the following table).

Yield (%)

Duration

5

6

7

8

9

10

11

  1. (7%) Compare and contrast (question 1, part c) and (question 2, part c) and interpret the results.

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