A financial security analyst consider a Bond M that has just been issued. Its face value is $1,000, it bears the current market interest rate of 5%, and it will mature in 8 years. Bond N was issued 5 years ago, when interest rates were higher. This bond has $1,000 face value and bears a 7% coupon rate. When issued, this bond had a 13-year maturity, so its remaining maturity is 8 years. Assume annual interest payments and a 9% yield to maturity on the bonds. The settlement date is 3rd March 2021.

a) Calculate the duration of bond M and bond N Using excel by

i. Computing and summing the discounting cash flows

ii. Using the Excel function DURATION. Interpret your results

b) Which bond has longer duration? Give reason.

c) Giving the reason, comment whether the two bonds are selling at a premium or loss.)