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Question 2 (Total 30 marks) (a) The 6 month, 12 month, 18 month, and 24 month zero rates are 5%, 5.5%, 6%, and 6.5% (all
Question 2 (Total 30 marks) (a) The 6 month, 12 month, 18 month, and 24 month zero rates are 5%, 5.5%, 6%, and 6.5% (all with continuous compounding) respectively. What is the par yield for a 2-year semi- annual bond? (9 marks) (b) A 2-year bond pays semiannual coupon of 8% per annum, the bond yield is 9.6% p.a. 4-6 (with continuous compounding). What is the bond's price? (The bond has face value of $100.) (9 marks) (c) Calculate the duration of the bond in (b), and then explain the meaning of the bond duration (6 marks) (d) Suppose the bond yield rises by 0.4 percentage point. Use the duration to calculate the (6 marks) effect on the bond's price. Question 2 (Total 30 marks) (a) The 6 month, 12 month, 18 month, and 24 month zero rates are 5%, 5.5%, 6%, and 6.5% (all with continuous compounding) respectively. What is the par yield for a 2-year semi- annual bond? (9 marks) (b) A 2-year bond pays semiannual coupon of 8% per annum, the bond yield is 9.6% p.a. 4-6 (with continuous compounding). What is the bond's price? (The bond has face value of $100.) (9 marks) (c) Calculate the duration of the bond in (b), and then explain the meaning of the bond duration (6 marks) (d) Suppose the bond yield rises by 0.4 percentage point. Use the duration to calculate the (6 marks) effect on the bond's price
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