Question 2 (this question has three parts, a) b) and c)) (20 marks)

Part a.

Explain why bond price and interest rates are negatively related. What is the role of coupon rate and term to maturity in this relationship?

(6 marks)

Part b.

Consider a 3-year bond with 14 percent semi-annual coupon payments and currently priced to yield 12 per cent per annum.

1. Calculate duration of the bond.
2. What is the percentage of price change if interest rate increases to 12.15% per annum?

(7+3=10 marks)

Part c.

	Bond A	Bond B
Price	$924.18	$950.26
Market yield	10%	10%
Coupon rate	8%	8%
Maturity	5 years	3 years
Duration	4.282 years	2.777 years

Based on above information, which bond is more sensitive to changes in the interest rate? Explain your answer.

(4 marks)