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1. a) COmpute the bond price

price = coupon *(1 - (1+r) ^(-n)) /r + FV / (1+r) ^n

coupon = 8% Fv = face value = 100 yield = 6% = r

n= number of years till maturity = 10

periods of compounding = 2

hence coupon = 8% * 100 / period of compounding =

8/2 = 4

r=6%/2 = 3% so n = 10*2 = 20

Using the above formula, we have

4* (1 - 1/ {1.03) ^(20)} 0.03 + 100/1.03^20

4* (1 - 0.5536)/0.03 + 100*0.5536

=59.52 + 55.36 = 114.88 b)

Modified duration can be calculated using the inouts

from part a)

modified duration = 7.07 calculated using excel

Please refer to the attached excel snip

Done

Face valuf

0 maturity

13 Price is Calculated a:

10

122 >8

6.67

24 Macaulay Duration a Modified Duration 1*(Yield/ Frequency)

The highlighted formula pane is for the Modified

duration

Macaulay Duration = Modified Duration * (1 + (Yield/

Frequency))

= 7.07* (1 + (0.06/2) = 7.29

C) here, we have yield as 6.05% as provided in the

question.

Using the same inputs as in a) we shall compute the

new price of the bond.

hence coupon = 8% * 100 / period of compounding

8/2 = 4

r= 6.05%/2 = 3.025% so n = 10*2 = 20

4* (1 - {1.03025) ^(-20)}/ 0.03025 + 100/1.03025^20

4* (1 - 0.55099)/0.03025 + 100*0.55099

=122.28

Please answer D.

1. The term structure is flat at 6%. A bond has 10 years to maturity and coupon rate 8%. Coupon payments are semiannual, par values are 100, and interest rates are expressed 88 semiannual APR (1) Compute the bond price. (b) Compute the bondy Macaulay and modified duration (c) Suppose the term structure moves up by 5 basis points (1 basis point = 0.01%), still staying flat. What is the bond's new price? (d) Compute the approximate price change using duration, and compare it to the actual price change

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