Question 5

Consider two zero-coupon Treasury bonds with 7-year and 1-year to maturity. You can assume that they both are risk-free and have the same face value. Which of the followings best describe their relationship? Choose the best answer.

a) The yields (i.e. zero rates) of these two bonds are negatively correlated

b) The 1-year zero-coupon bond price is traded at par

c) The 7-year zero-coupon bond price is traded at a higher price than that of the 1-year bond

d) The yield of the 7-year bond is higher than the yield of the 1-year zero bond

e) The price of 1-year zero coupon bond is more volatile than the price of 7-year zero coupon bond

f) None of the above

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Question 6

Find the dollar duration of the following bond. Face value $1000. Coupon rate of 5% paid annually. Maturity of 3 years. The yield to maturity of the bond is 2%. Assume annual compounding.

a) -$2799.62

b) -$2937.37

c) -$3052.40

d) -$3428.91