Consider a green bond with a 5% coupon rate, an 8% yield to maturity and a 1000

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Question:

Consider a green bond with a 5% coupon rate, an 8% yield to maturity and a £1000 par value issued to finance a hydroelectric power project. The bond matures in 2 years. Assume semiannual payments. Answer the below questions,

1. Explain what is a ‘Green Bond’. (20 marks)

2. Calculate the value of this green bond. (10 marks)

3. Calculate the Macaulay duration of this bond. (10 marks)

4. What is the bond’s convexity? (15 marks)

5. If yield rises by 10 basis points (bp), calculate the best approximate price impact for this bond? (15 marks)

6. Provide an explanation for Malkiel’s Second Bond Theorem: ‘for a given change in yield, changes in bond prices are greater, the longer the term to maturity’. Use a diagram to help illustrate your answer. (30 marks)