Evaluating these 3 bonds

Face value Coupon rate Maturity year

A 1000 8% 5

B 1000 6% 10

C 1000 0% 10

Suppose the yield curve is flat at 7% for all maturities. Use annual compounding in this problem.

a) Without doing any math - would Bond A and B be trading at a discount/premium? Justify your answer (4 marks)

b) Calculate the price for all three bonds. Is your answer from a) in line with your findings in b) for bond A and B?

c) Without doing any math, which bond would have the higher duration? Bond A or B? Explain why.

d) Calculate the Macaulay duration for Bond A and B. Is this in line with your expectation form c)?

e) There is no need to calculate duration for Bond C. Why/ What is its duration?

f) Say you need to create a immunising portfolio with a duration of 9 years. Show two ways how you could create a immunising portfolio using any combination of bonds A, B, and C.