You are an investment consultant working for a superannuation firm. One of the fixed-income portfolio managers wants to understand more about managing interest rate risk in the portfolio, and she is particularly interested in understanding the concept of duration. The portfolio contains an annual paying, option free bond which had a yield to maturity of 8% when it was initially purchased at par value. If the current one year, two years, three year and four-year spot rates are 4.5%, 6%, 8% and 9% respectively, what is the value of the option free bond if there are 4 years left to maturity? Assume a face value of 100 and that coupons are paid annually. There is no accrued interest component

1. What is the value of the option free bond that is being considered for purchase? You must show all working

One of the fixed-income portfolio managers is considering purchasing a bond between settlement periods with a 6.4% coupon rate and 8 semi-annual coupon payments remaining. There are 183 days in the coupon period and the days between the settlement date and the next coupon period is 75.

2. What is the dirty price for this bond if a discount rate of 5% is used?

1. 3. What is the accrued interest for this bond?
2. 4. What is the clean price of this bond?
   5. Now suppose you are interested in a puttable bond and you expect interest rates to fall by a significant amount shortly. Discuss your estimation of duration concerning the embedded put option.