1. Use Excel or your FIN calculator to do the following exercise. It will be rather time consuming if you use the formulas in the text.

(a) In the Table below is a bond with Coupon = YTM initially (columns 1 and 3). Then, in Col 2, I am increasing the time to maturity. Calculate the Duration for each maturity and report them in Col 4. Assume annual coupon cash flows, i.e., this is an annual bond (not semiannual).

Col 1	Col 2	Col 3	Col 4	Col 5	Col 6
CPN%	MATURITY	YTM%	DUR	YTM%	DUR
11.75	3	11.75		6.75
11.75	7	11.75		6.75
11.75	10	11.75		6.75
11.75	20	11.75		6.75
11.75	30	11.75		6.75

(b) Next, I have reduced YTM to 6.75% (in Col 5). For the same maturities, now calculate the durations and report in Col 6. Once you have done that answer the following questions:

(c) What do you conclude about the relationship between duration and time to maturity based on Col 4 results? Examine the change in time relative to change in duration and discuss that in your answer.

(d)What do you conclude about duration when comparing Col 4 to Col 6 results?

2.

	Bond A	Bond B
Coupon	8%	9%
Yield to maturity	8%	8%
Maturity (years)	2	5
Par	$100.00	$100.00
Price	$100.00	$104.055

(a) Calculate the actual price of the bonds for a 100-basis-point increase in interest rates.

(b) Without working through calculations, indicate whether the duration of the two bonds would be higher or lower if the yield to maturity is 10% rather than 8%.

3. To what degree to you agree or disagree with the following statement: the price responsiveness of a zero-coupon bond to yield changes is the same regardless of the level of interest rates. Support your answer using an example.

4. A bond fund manager made the following statement:

"My Fund will sell off $400 million of long zero-coupon Treasuries and include equal value of intermediate Treasuries. . . . The will reduce the duration of the Fund's $2.5 billion fixed-income portfolio. . . ."

Why would this swap described here shorten the duration of the portfolio?