Sue purchased a 5-year Treasury bond with a coupon rate of j2 = 4.52% p.a. and a face value of $100 that matures at par. The purchase price was $93.695.

QUESTION 5 [3 marks] Use linear interpolation to calculate the yield rate. Give your answer in j2 form, rounded to 2 decimal places. Hint: 2.85% per half year and 3.15% per half year are the lower bound and the upper bound for the linear interpolation. Select the correct answer.

a. 3.00% b. 3.07% c. 6.00% d. 6.14%

QUESTION 6 Sue decided to hold this bond to maturity. Over the five years the reinvestment rates she earned are shown in table 1. Calculate Sues total realised compound yield rate. Give your answer in j2 form, rounded to 2 decimal places.

a. 5.73% b. 5.79% c. 5.82% d. 5.95%

[3 marks]

Table 1: Reinvestment rates Year 1Year 2 j2 = 3.9%

Year 3Year 5 j2 = 4.2%

4

QUESTION 7 [2 marks] Assume that Sues bond is subject to a 30% tax on interest and capital gain. Recal- culate the price Sue paid if the net yield rate is j2 = 5.7% p.a. and all tax payments (interest tax payments and capital gain tax payment) are paid immediately when taxable cash flows occur. Round your result to three decimal places. Select the correct answer.

a. 85.909 b. 87.998 c. 92.332

d. None of above option is correct.

QUESTION 8 [2 marks] Which of following state is correct? Select the correct answer.

Based on the question 7, bond price can be lower if Sue does need to pay tax immediately.

Based on the question 6, Sues total realised compound yield rate can be higher if the reinvestment rate is lower.

The duration of Sues bond can be higher, if the bond coupon rate is lower.

None of above statement is correct