A 4-year 6%pa semi-annual coupon-paying bond has just been issued and is trading at a yield of 7.5%pa. If the bond has a face value of $100, calculate the following using Excel:

a) Calculate the current value of the bond. (3 marks)

b) Calculate the Macaulay duration of the bond. (6 marks)

c) Assume the yield decreases to 6.7%pa. Using your duration measure, what is the estimated value of the bond? (3 marks)

d) Calculate the convexity of the bond at a yield of 7.5%pa. (5 marks)

e) Assume the yield falls to 6.7%pa. Using your duration and convexity measure, what is the estimated value of the bond? (3 marks)

f) Calculate the actual value of the bond when the yield falls to 6.7%pa. and comment on your result compared to your answers to questions (c) & (e). (3 marks)

Please use the one excel document to answer all parts of the question.

Answer rating: 100% (QA)

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