P1

Given the following data:

German Bond

U.S. T- Bonds

Maturity

25

30

Coupon Rate

4.88%

4.50%

YTM

3.10%

2.80%

Face Value

 $             1,000.00

 $              1,000.00

Coupon payment

Annually

Semi-Annually

a

Compute the price of each bond.

b

Compute the duration and modified duration of each bond

c

Suppose the yield levels increase by 1%.  Calculate the relative price change for each bond.

Estimate the relative price change for each bond using duration. Comment on the accuracy of the estimation.

P2

An investor buys a French government, 10-year bond, paying annual coupon of 4.5%. Face value = 1000.

The investor is unsure of his investment horizon and considers 5 horizons: 5, 6, 7, 8, and 9 years.

Suppose that immediately after the investor has bought the bond, the interest rate changes.

Compute the investor's annual return for each of the 5 horizons for two scenarios: the yield increases by 1% and the yield decreases by 1%.

Put differently, complete the following table:

Annual Return

Horizon (years)

YTM = 5.5%

YTM = 3.5%

5

6

7

8

9

P3

Given the data for the following bonds

Bond

Coupon

Maturity

YTM

Face Value

1

0

1

4%

1000

2

4.50%

2

6%

1000

3

6%

2

1000

Assume all bonds pay annual coupon.

a

Compute the price of the 3rd bond.

b

Calculate the YTM of the 3rd bond.