Question 3

a. Calculate the Price and Macaulay duration of a Bond if it pays annual coupon of 12% per annum, with face value of $100 and 5 years to maturity. The current market interest rate is 10%. (24 marks)

b. Use your answer (Duration-model) to predict the value of the bond following a 10 basis points increase in the yield of the bond. (8 marks)

c. Calculate the actual price change for a 10 basis points increase in the yield of the bond. (8 marks) d. Comment on the discrepancy (if any). (10 marks)