QUESTION 4 [20 Marks] a. The government of a heavily indebted country has a range of bonds cuirently in issue. These include bonds with nominal amounts outstanding of RM4bn and RM5bn with terms to redemption of exactly three years and ten years respectively from the current time. Both bonds pay annual coupons in airear of 4%. The government is negotiating a restructuring of its debt portfolio and proposes to transform the three and ten-year bonds into perpetuities paying an annual coupon of 5% in airear. The yield cuive is currently flat with gross redemption yields at 6% per annum effective. i. Calculate, showing all workings, the duration of the current portfolio of three and ten- year bonds. [7 marks] Calculate, showing all workings, the duration of the proposed portfolio of bonds. [4 marks] ii. The government's objective is that the present value of the proposed portfolio of bonds will be 80% of the present value of the current portfolio of three-year and ten-year bonds. iii. Determine the nominal amount of the new bonds that the government will have to issue to achieve the objective. [2 marks] QUESTION 4 [20 Marks] a. The government of a heavily indebted country has a range of bonds cuirently in issue. These include bonds with nominal amounts outstanding of RM4bn and RM5bn with terms to redemption of exactly three years and ten years respectively from the current time. Both bonds pay annual coupons in airear of 4%. The government is negotiating a restructuring of its debt portfolio and proposes to transform the three and ten-year bonds into perpetuities paying an annual coupon of 5% in airear. The yield cuive is currently flat with gross redemption yields at 6% per annum effective. i. Calculate, showing all workings, the duration of the current portfolio of three and ten- year bonds. [7 marks] Calculate, showing all workings, the duration of the proposed portfolio of bonds. [4 marks] ii. The government's objective is that the present value of the proposed portfolio of bonds will be 80% of the present value of the current portfolio of three-year and ten-year bonds. iii. Determine the nominal amount of the new bonds that the government will have to issue to achieve the objective. [2 marks]