Question: Consider a $1000 face value 2 years maturity bond paying 8% coupon rate per annum. Coupon is paid yearly basis. Market rate of return on

Consider a $1000 face value 2 years maturity bond paying 8% coupon rate per annum. Coupon is paid yearly basis. Market rate of return on similar bond is 12%. Expected interest rate change for next year is 0.50%. Answer the following questions.

(a) The bond is currently selling at $920. Should you buy this bond? Explain the reason.

(b) Should the bond value increase next year? Explain why/why not.

(c) Calculate the duration of the bond. Explain why duration is usually presented as a negative figure.

(d) Forecast the price for next year. Assume that the current price is $920.

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