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QUESTION THREE Assume that you buy a 3-year bond today. The bond has a coupon rate of 10% a yield to maturity of 10% and
QUESTION THREE
- Assume that you buy a 3-year bond today. The bond has a coupon rate of 10% a yield to maturity of 10% and a face value of 1000. The bond pays annual coupons.
- Which is the price of the bond today?
- Assume that you want to sell the bond after one year. The yield to maturity at this time is 8%. What is the new price of the bond?
- What is the holding period return of your investment?
b.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. (max 50 words)
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