Question 3 You are given the following information on three bonds (A, B and C), making annual coupon payments: Bond Face value Coupon Maturity ABC rate 100 0.00% 100 100 date 31/03/18 4.20% 31/03/19 8.40% 31/03/20 Yield to maturity Settlement Basis date 4.00% 31/03/17 1 5.65% 31/03/17 1 7.45% 31/03/17 1 (a) Calculate the clean and the dirty prices of the three bonds (use Excel functions). [20%] (b) Estimate the changes in the values of the bonds if the yields to maturity rise by 1% (using the duration approach). Comment on the results. (c) Using bond C as an example, show graphically the effect of increasing the bond's [20%] coupon rate on its duration. Suggest an explanation behind this effect. (d) Plot the impact of changes in the yield to maturity on bond B's prices, making [20%] sure that you show its curvature. (e) What is the zero-coupon bond yield for a two-year bond based on the price of [20%] bond B? What is the zero-coupon bond yield for a three-year bond based on the price of bond C? What do the results suggest about the shape of the term structure? [20%]