BBC has just issued a new annual coupon bond that has 5 years to maturity, a coupon rate of 6% and trades at par at a price of $1000. You may assume that the yield-curve is flat. 

a) Compute the duration of the BBC bond. 

 

b) Estimate the dollar price change of the BBC bond using duration if interest rates increase by 0.5%. 

 

c) The government has recently issued five series of zeroes (zero-coupon bonds) with 6 month, 1 year, 18 month, 2 year and 30 month maturity horizons. If the bonds have respective prices of $966.18, $929.59, $891.12, $851.57 and $811.66 bootstrap the 1 year, 18 month and 2 year forward 6 month rates. 

 

d) Identify if the 6 month forward-rate curve you computed in c is in a state of backwardation, contango or is flat.

Answer rating: 100% (QA)

a To compute the duration of the BBC bond well use the formula Duration 1 y 1 1 yn y Where y is the yield or coupon rate per period n is the number of ... View the full answer