DO NOT ANSWER IN EXCEL PLEASE, THIS IS PAPER TEST

Question 1. Answer all parts I. Consider the following three bonds Par Value Coupon Time to Maturity Required Yield Bond 1 1,000 6% 4 years 6% Bond 2 1,000 9% 3 years 6% Bond 3 1,000 Zero 6 years 6% (a) Calculate the present values of each bond (b) Calculate the Macaulay duration and Modified duration for each bond [12 marks] [12 marks] (c) If required yield increases from 6% to 6.7%, use duration to calculate the price changes for each bond and explain whether these calculated price changes are precise and why [12 marks] (d) Which bond do you advise the portfolio manager to buy if he is expecting a fall in the uture interest rate? [3 marks] II. Explain, providing examples, the principles of the cash matching technique for a bond portfolio [8 marks] Ill. Consider a bond portfolio X, which achieved a return of 25% over the previous year, with an average duration of 14 years. The duration of the market portfolio of bonds was 7 years, and the risk-free rate was 5%. What is the duration-adjusted excess return of portfolio X? [3 marks] Question 1. Answer all parts I. Consider the following three bonds Par Value Coupon Time to Maturity Required Yield Bond 1 1,000 6% 4 years 6% Bond 2 1,000 9% 3 years 6% Bond 3 1,000 Zero 6 years 6% (a) Calculate the present values of each bond (b) Calculate the Macaulay duration and Modified duration for each bond [12 marks] [12 marks] (c) If required yield increases from 6% to 6.7%, use duration to calculate the price changes for each bond and explain whether these calculated price changes are precise and why [12 marks] (d) Which bond do you advise the portfolio manager to buy if he is expecting a fall in the uture interest rate? [3 marks] II. Explain, providing examples, the principles of the cash matching technique for a bond portfolio [8 marks] Ill. Consider a bond portfolio X, which achieved a return of 25% over the previous year, with an average duration of 14 years. The duration of the market portfolio of bonds was 7 years, and the risk-free rate was 5%. What is the duration-adjusted excess return of portfolio X? [3 marks]