You are instructed by the Senior Finance Manager to evaluate the following bonds and offer your valuable recommendation $($Note: Face value of each bond is $$100\mathrm{.}00).$

Bond

Coupon rate $($annual payments$)$

Maturity $($years$)$

A

$0\%$

$15$

B

$0\%$

$10$

C

$4\%$

$15$

D

$8\%$

$10$

Required:

$1.$Compute the percentage change in the price of each bond if its yield to maturity falls from $6\%$ to $5\%..$

$2.$Based on your answer in part $1,($i$)$ Assess the bond that is most sensitive to a $1\%$ drop in interest rates from $6\%$ to $5\%.(1$ mark$)($ii$)$ Assess the bond that is least sensitive to a $1\%$ drop in interest rates from $6\%$ to $5\%.$

$3.$ Based on your answer in part $2,$ critically evaluate the rationale behind for selecting such bond. Provide an intuitive explanation for your answer.

You are instructed by the Senior Finance Manager to evaluate the following bonds and offer your

valuable recommendation $($

Note: Face value of each bond is $$100\mathrm{.}00).$

Required:

Compute the percentage change in the price of each bond if its yield to maturity falls from

$6\%$ to $5\%..(4$ marks$)$

Based on your answer in part $1,($i$)$ Assess the bond that is most sensitive to a $1\%$ drop in

interest rates from $6\%$ to $5\%.(1$ mark$)($ii$)$ Assess the bond that is least sensitive to a $1\%$

drop in interest rates from $6\%$ to $5\%.(1$ mark$)$

Based on your answer in part $2,$ critically evaluate the rationale behind for selecting such

bond. Provide an intuitive explanation for your answer. Hint: you need to explain your

answers based on part $2($i$)$ and $($ii$).(4$ marks$)$