Question 3 (7 marks)

a. A 8% coupon bond paying interest annually has a modified duration of 12 years, sells for $750, and is priced at a yield to maturity of 10%. If the YTM decreases to 9%, what is the predicted change in price using the duration concept? (2 marks)

b. A bond with annual coupon payments has a coupon rate of 6%, yield to maturity of 8%, and Macaulay duration of 10 years. What is the bonds modified duration? (2 marks)

c. Which bond has the shortest duration? Explain. (3 marks) i. 6-year maturity, 4% coupon.

ii. 6-year maturity, 9% coupon.

iii. 12-year maturity, 4% coupon.

iv. 12-year maturity, 9% coupon.