1. Try to produce the tables 3.3 and 3.4 from the Mishkin and Eakins book (pages 98 and 99) for calculating duration in Excel. They both represent a bond with a face value of 1000 dollars, 10 years to maturity, a coupon interest rate of 10% and only one coupon payment per year. Cash payments (column 2) are the annual coupon payments and the final face value payment. How much is the price of the bond when the market interest rates are 10% and 20%? If we assume the market rates increase from 10% to 20% how much will be the capital gain? Calculate the rate of return.
2. Now make the same tables (as in A.) for a bond with a face value of 1000 dollars, 10 years to maturity, a coupon interest rate of 15% and only one coupon payment per year. Apply the two scenarios for market interest rates of 10% and 20%. How much is the price of the bond when the market interest rates are 10% and 20%? If we assume the market rates increase from 10% to 20% how much will be the capital gain? Calculate the rate of return.
3. Now make the same tables (as in A.) for a bond with a face value of 1000 dollars, a coupon interest rate of 10% and only one coupon payment per year. Assume that the years to maturity are 13 instead of 10. Apply the two scenarios for market interest rates of 10% and 20%. How much is the price of the bond when the market interest rates are 10% and 20%? If we assume the market rates increase from 10% to 20% how much will be the capital gain? Calculate the rate of return.

Now compare the cases A. and B. What are your conclusions about the capital gain and the RET when we compare two bonds with the same maturity but different coupon rates?

Compare case A. and case C. What are your conclusions about the capital gain and the RET when we compare two bonds with the same coupon rates but different maturities?