Question: Consider the following three option-free Treasury bonds: Bond Term to Maturity A 2 years B 5 years C 10 years Coupon Rate 10% 8%

Consider the following three option-free Treasury bonds: Bond Term to Maturity Coupon Rate A2 years 10% B5 years 8% с10 ye

Consider the following three option-free Treasury bonds: Bond Term to Maturity A 2 years B 5 years C 10 years Coupon Rate 10% 8% 7% Face Value $100 $100 $100 Q1: Suppose the yield to maturity is fixed at r= 6.87%, what is the prices of each bond? (6 marks) Q2: The market price for the three bonds are PA = $94.26, PB = $113.58, Pc=$100. What is the yield to maturity of each bond? (10 marks) Q3: Explain the concept of yield to maturity. In what condition will the actual rate of return equal to the yield to maturity upon the end of investment, as calculated from above? (6 marks) Q4: Calculate the annualized modified duration and Macaulay duration of each bond both in exact way and in approximated way. Also, interpret the meaning of modified durations and Macaulay durations in terms of these three bonds. (20 marks)

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