Bond A offers annual coupon rates of 7% over 10 years. The coupon payments are made at the end of each year. The bond will return the principal of $1000 together with the last coupon payment at the end of year 10. The current yield to maturity is 5%. 

a. What should be current the price of Bond A?

b. What is the duration of Bond A?

c. If the discount rate changes from 5% to 8%, will the price of the Bond A increase or decrease? Provide your rationale for your answer (no calculations needed).

d. At what rate the coupon payments are reinvested?

e. If you short Bond A, will convexity work in your favor or against you? Justify your answer in words.

Answer rating: 100% (QA)

a The current price of Bond A can be calculated as the present value of all future cash flows coupon ... View the full answer