Three problems, do all parts. Through D84. Show rates as percentages in your final answer. Example .0461 = 4.61% Turn in with your test on Tuesday Nov. 5. You may do it by hand or print it out if you do it in excel. Problem 1

Bond A 4 Years Coupon 0.06 par 100 YTM 0.05 Annual Compounding.

a. What is the price of this bond?

b. What is the Price of this bond if you sell it after two years? Assume rates stay at 5%.

c. Assume rates go up to 8% immediately after you purchase this bond(before the first coupon payment) If you sell sell the bond at the end of year two what is the future value of the reinvested coupon payments at that time?

d. What is the value of the bond at the end of two years? (rates go to 8%) 3

e. What is you horizon return at the end of two years? (rates go to 8%)

f. Calculate the amount of your capital gain or loss. State whether it is a gain or loss.

Problem 2 Given the following yields on zero coupon bonds (spot rates) Calculate the implied 1Y1Y forward rate ad the 2Y1Y forward rate. Assume annual compounding Maturity Yield to maturity 1 year 2.50% 2 Year 2.78% 3 Year 3.10%

a. What is the 1Y1Y rate? What does this rate quotation "1Y1Y" mean?

b. What is the 2Y1Y rate? What does this rate quotation "2Y1Y" mean?

Problem 3

a. An investor buys a 7% annual payment bond with three years to maturity. The bond has a yield-to-maturity of 9% and is currently priced at 94.937411 per 100 of par. Calculate the bond's Macaulay duration? Use the grid method. Label all columns

b. Calculate the bond above's Modified duration.

c. The bond above is Bond A in the portfolio below. Calculate the portfolio's modified Duration. Bond Market Value Modified Duraton Bond A $47,468.71 ? Bond B $63,512.16 3.8 Bond C $39,648.21 9.3 Portfolio ?