3. A client of Mr. Richards wants to purchase one of threebonds: a) 10-year corporate bond with a 2.00% coupon, payingannually, and par value of $1,000. b) 7-year corporate bond with a1.75% coupon, paying annually and par value of $1,000. c) 5-yearcorporate bond with a 1.50% coupon, paying annually and par valueof $1,000. What are the current prices for each of these bonds? Howwill the value of these bonds change if the respective market ratesincrease by 50 basis points? How will the value of these bondschange if their respective market rates decrease by 50 basispoints? What recommendation would you make about purchasing one ofthese three bonds? Would you suggest any further analysis thatmight include the use of a relative interest rate risk measure usedfor bonds? Excel: Using the Basic TVM setup, calculate the value ofthese bonds, where FV is the par value, pmt is the current coupon(rate * par / payment frequency), PV is the current price, rate isthe current market rate or in this case the coupon and ratechanges, NPR is the years * M. For the rate changes, literally,copy the three bonds and then change the Rate to +/- .005 or 50BPS. Setup a summary to show the average sensitivity of each bondand for the rate changes. Include this summary in the writtenanalysis. Written: Briefly describe the analysis that you haveperformed detailing the relative prices. Also explain how the valueof the bonds change in the up/down rate changes. Provide yourrecommendation about which bond to buy. Discuss what risk measuresshould be considered. 4. Mr. Richards wants additional analysis onthese bonds. He wants you to assume that a year has transpired andto make the following assumptions about the bonds: each bond isexactly 1 year shorter in term rate levels are 1.75% for 9 years,1.50% for 6 years and 3 1.25% for 4 years. Calculate the value ofeach bond and their relative rate sensitivity from a +/- 50 BPSrate change. Excel: Using the Basic TVM setup from question 3. Nowchange both NPER and rates to those indicated above. Compare thechange in value from par. Summarize this potential gain in a tableand include it in the written analysis. Written: Briefly describethe analysis that you have performed detailing how the valueschanged as they rolled down the yield curve. Based on each one ofthese bonds rolling down the yield curve and having a gain, whichbond looks to have the most gain in market value and the highestoverall yield? Based on this analysis which bond would you nowrecommend and what additional analysis should have been performedbefore purchase? 5. Mr. Richard now wants you to apply theeffective duration formula he learned in CFA training to the bondsat issue and 1 year forward from questions 3 and 4. ????????????????? = ??234567 ? ??934567 2 ? ??<=>? ? 50 He would alsolike a marginal analysis performed for both the original and theforward bond analysis. This should show the base duration and yieldfor the shortest bond and then the change in yield and duration foreach longer bond. He explains that the 5 year is the base and thechange shows the additional risk/reward for buying the longermaturities. Excel: Using the results from questions 3 and 4 andcalculate the effective duration as shown in the formula. Be verycareful to use the brackets as shown above. The durations for thesebonds should all be between 1 and 3 as a range so any larger orsmaller values means a formula problem. Perform the marginalanalysis for both sets of bonds as indicated above and include thetables in the written analysis. Written: Briefly describe theanalysis that you have performed detailing how the effectivedurations changes as the bonds down the yield curve. Based on theshort bonds yield and duration, which bond appears to provide themost marginal yield for the least marginal duration? Look at theyears of yield and duration (divided both by the term and then lookat the marginal change for the longer bonds.) Based on thisanalysis which bond would you recommend at issue and why?