Question 2:

(50% of marks)

You are required to produce a table showing bond values and the impact of changes in interest rate over the life of a bond and a diagram demonstrating the link between thechanges in values(due to changes in interest rate) andtime to maturity.

The bond has a face value of $1,000, pays a coupon rate of 7% p.a paid annually and it is issued with 10 years to maturity. All calculations should be executed in excel.

Your table should show the following:

• The value of the bond, year by year (from date of issue until its maturity), assuming
• all other things remain the same.
• The value of the bond, year by year, from date of issue until its maturity, assuming
• that market interest rate increases by 1.5% (hence yield to maturity increases by
• 1.5%), all other things remain the same.
• The potential % change in value, year by year, from the date of issue until its maturity.
• The % change in value demonstrates the impact of the increase in interest rate on the
• bond value (or interest rate risk), for each year of maturity.
• From your table produce a diagram that demonstrates the relationship between %
• change in value and time to maturity.
• The initial market interest rate (yield to maturity) to be used is5% plus the last digit of your student number. For example if your student number ends in a '0' then theyield to maturity is 5%, but if your student number ends in a '9' then theyield to maturity is 14%.
• the last number of my student ID is 2