Ah Cheung is the portfolio manager for large pension fund and isconsidering investing $100 million to purchase the following 3choices of ABC Ltd issued bonds:

•ABC Bond A matures in 5 years and pays a 9%p.a. coupon on a$1,000 face value bond).

•ABC Bond B matures in 10 years, pays an 8%p.a. coupon yield andis being offered at PAR.

•ABC Bond C is a zero-coupon bond but will pay the face amountof $1,000 per bond at maturity in 10 years.

Note: All bonds pay coupon semi-annually and have market pricesthat imply a YTM of 8%p.a. Each of the 3 bonds is based on a $1,000face value (par value) to be repayable at maturity.

(A) Without performing any calculations, can you roughly guessthe price of the 3 bonds compared to PAR? (Hint: Observe therelationship between coupon and coupon.)

(B) Calculate each bond price?

(C) In the following table, it is the prices of the three bondsat 5% & 11% yield (YTM) comparing to their valuations when therequired yield (YTM) was 8%p.a.:

YTM	ABC Bond A	ABC Bond B	ABC Bond C
5%	$1,175.04	$1,233.84	$610.27
11%	$924.62	$820.74	$342.73

Explain why each of these bonds has a different degree ofsensitivity to a +/- 3% change in required yield (YTM). Give yourreasoning in terms of volatility based on maturity and couponeffect.

(D) Calculate the duration of ABC Bond A, B, C?

(E) As an alternative, Ah Cheung has been invited to invest $1million in a 10-year bond of a second firm, XYZ. XYZ bonds aresimilar in risk to “ABC Bond B”: they both pay 8%p.a. coupon for 10years, but XYZ bonds pay coupon annually, not semi-annually as inthe case of ABC. The XYZ bonds are priced 99% (or $990 per $1,000face value).

What yield to maturity (YTM) is implied by the XYZ bond? Comparethis yield to the 8%p.a. of the ABC semi-annual coupon bond (BondB) above. In which bond should Ah Cheung invest?