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?

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

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. Two ways how you could create a  immunising portfolio using any combination of bonds A, B, and C.

Answer rating: 100% (QA)

a Bond A and B would be trading at a discount This is because the coupon rates for both Bond A 8 and Bond B 6 are higher than the yield of 7 When a bonds coupon rate is higher than the yield it typica... View the full answer