a.It is July 30, 2017. The cheapest-to-deliver bond in a September 2017 Treasury bond futures contract is a 13% coupon bond, and delivery is expected to be made on September 30, 2017. Coupon payments on the bond are made on February 4 and August 4 each year. The term structure is flat, and the rate of interest with semiannual compounding is 12% per annum. The conversion factor for the bond is 1.5. The current quoted bond price is $110. Calculate the quoted futures price for the contract. (50 marks)

b.A five-year bond with a yield of 11% (continuously compounded) pays an 8% coupon at the end of each year.(50 marks)

1What is the bond's price?

2What is the bond's duration?

3Use the duration to calculate the effect on the bond's price of a 0.2% decrease in its yield.

4Recalculate the bond's price on the basis of a 10.8% per annum yield and verify that the result is in agreement with your answer to (3).