Question: QUESTION TWO Your firm, Delta Asset Managers, is evaluating two corporate bonds to determine their attractiveness for inclusion in a long-term portfolio. Bond A Face

QUESTION TWO

Your firm, Delta Asset Managers, is evaluating two corporate bonds to determine their attractiveness for inclusion in a long-term portfolio.

Bond A

Face Value (KES) 100,000
Coupon Rate 8% (Annual)
Time to Maturity 3 Years
Spot Rates (Years 1-3) 5%, 6%, 7%

Bond B

Face Value (KES) 1,000
Coupon Rate 10% (Semi-Annual)
Time to Maturity 5 Years
Market Interest Rate 9% p.a.

Required:

  1. Compute the price of Bond A using the Spot Rate Method and compare it with the price derived using the Discounted Cash Flow (DCF) method.
  2. Compute the Macaulay Duration and Modified Duration for Bond B and discuss their implications for interest rate risk.
  3. Compute the Convexity adjustment for Bond B assuming a 1% shift in interest rates.

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