Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually. Two years ago, the market yield-to-maturity was 3% p.a. Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a.

a) Determine the market price of the bonds at issue based on an appropriate model. (10 marks)

b) Based on the yield-to-maturity today, assess whether the price has changed and proceed to determine its market price today. (10 marks)

c) Compare the results in (a) and (b) above and interpret the sensitivity of bond prices to maturity and yield to maturity. (5 marks)