c and d

1. [20 marks] A three-year bond with a yield of 6% p.a. (continuously compounded) pays a 4% coupon at the end of each year. The face value is $100. (a) What is the bond's yield duration? (b) Use the duration to estimate the bond's price if the yield decreases 0.1%. (c) Recalculate the bond's price on the basis of a 5.9% per annum yield (continuously compounded). What is the error of the prediction in part (b)? (d) Suppose that a second bond with a market price of $105 and a duration of 2.5 is used to hedge against interest rate risk. How much face value of the second bond should one short for each $100 face value of the first bond? 1. [20 marks] A three-year bond with a yield of 6% p.a. (continuously compounded) pays a 4% coupon at the end of each year. The face value is $100. (a) What is the bond's yield duration? (b) Use the duration to estimate the bond's price if the yield decreases 0.1%. (c) Recalculate the bond's price on the basis of a 5.9% per annum yield (continuously compounded). What is the error of the prediction in part (b)? (d) Suppose that a second bond with a market price of $105 and a duration of 2.5 is used to hedge against interest rate risk. How much face value of the second bond should one short for each $100 face value of the first bond