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Consider an annual bond with 3 years before maturity, $100 face value and 10% annual coupon. The zero rates for one year, two years, and
Consider an annual bond with 3 years before maturity, $100 face value and 10% annual coupon. The zero rates for one year, two years, and three years are 11.3%, 11.6%, and 11.7% respectively. (a) Calculate the bond price. (3 marks) (b) Explain what bond yield is. Then, find which one of the following is the bond yield: 10.17%, 10.42%, 10.89%, 11.20, or 11.68%. Show calculations. (4 marks) (c) Calculate the bond duration of this bond. Then, suppose the bond yield will decrease by half a percentage point in the next hour, how do you revise your bond valuation using the bond duration? Show calculations. (4 marks) (d) The par yield of a bond is defined to the coupon rate that makes the bond price equal to the bond par value. Calculate the par yield of a 3-year annual bond
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