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QUESTION ONE Assume that there are two available bonds to buy. Bond A has a maturity of 4 years, a coupon rate of 8% a
QUESTION ONE
Assume that there are two available bonds to buy. Bond A has a maturity of 4 years, a coupon rate of 8% a yield to maturity of 6%, a face value of 1000, and it pays annual coupons. Bond B is a zero-coupon bond with a maturity of 4 years, yield to maturity of 6% and face value of 1000.
- Calculate the Macaulay duration for both bonds.
- Based on duration, which bonds price has a higher sensitivity to changes in the interest rates?
- Assume that yields to maturity increase by 2% for both bonds. Calculate their percentage price change as a result of the increase in the yields, using duration.
- How accurate was the estimated price change using duration? Explain your answer.
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