Question 2 Suppose that you have observed the following term structure of interest rate from the zero-coupon bonds trading in the market. Bond Years to maturity Forward Rate A 1 B 2 3 The par value of these bonds is $1,000. 5.00% ??? 7.50% Market Price $952.38 $898.45 i) Find the yield to maturity of the bond. ii) Calculate the duration of the bond. (4 marks) a) Calculate the forward rate at year 2. b) Calculate the yield to maturity of a 3-year zero-coupon bond. c) A 3-year maturity bond with a par value of $1,000 makes annual coupon payments at a coupon rate of 6%. If the bond is selling at $1,080 today: (2 marks) (2 marks) (4 marks) d) Discuss the limitation of using duration in estimating the change of bond price in response to the change in yield. (3 marks) (Total 15 marks)