Question

Bond Valuation

Assume

A fixed income security is option-free.

The par value (face amount) is $1,000.

The coupons are paid on a semi-annual basis.

The coupon rate is 4%.

The current market yield for the security for the security is 3%.

There are 8 years left to the maturity date.

Deliverable

Excel spreadsheet items.

1. Calculate the price of the fixed income security. Show your work.
   1. Show the coupon payments in dollars each period.
   2. Show the principal payment in dollars (par value, face amount) at maturity.
   3. Show the present value of each cash flow payment.
   4. Sum the present values or each cash flow payment to obtain the price.
2. Calculate the duration of the fixed income security. Assume a 20 bps move up and a 20 bps move down to calculate the duration. Show your work.
3. If you changed to coupon rate to 2%, but kept the market yield to maturity at 3%, what happens to duration? Does it increase or decrease? Briefly explain why. No math is needed to explain why.

Answer 1