Part A (30 marks) For the Bond issued to you:
1. Calculate the Price of your Bond at the given Yield-To-Maturity; briefly explain the issues around your answer. (5 marks)
2. Calculate the Price of your Bond if the Yield-To-Maturity increases by 50 basis points; briefly explain the issues around your answer. (5 marks)
3. Calculate the Price of your Bond if the Yield-To-Maturity decreases from that stated by 50 basis points; briefly explain the issues around your answer. (5 marks)
4. Calculate the Macaulay Duration of your Bond at the given Yield-To-Maturity. (7.5 marks)
5. Calculate the Convexity of your Bond at the given Yield-To-Maturity; briefly explain the results. (7.5 marks) Part B (30 marks) You are discussing investing in bonds with a client. They ask you to explain the factors that should be taken into account when choosing a bond. Critically explain the following terminology with respect to a bond valuation:
• Trading at a premium
• Trading at a discount
• Price-Yield curve
• Bond’s maturity
• Credit/Default risk
• Call risk Your explanation should all be expressed in your own words; do not use material copied from other sources. Maximum 500 words. Part C (40 marks)
Write 500 words on how a Fixed Income Portfolio Manager would use information on Duration and Convexity in choosing which bonds to buy and which to sell in differing market and economic conditions. You should include appropriate academic references. Do NOT just describe the terms Duration and Convexity
