09 May CALCULATE THE CURRENT PRICE OF EACH $1 000 000 BOND CORRECT TO THE NEARER CENT.
Absolusia an emerging economy has just made an issue of coupon-paying bonds each with 3 years to maturity and a face value of $1 000 000.Each bond has a coupon rate of 4% per annum payable half-yearly.The bonds have a yield of j2 = 6% that is 6 per cent per annum compounded half-yearly.(a)Calculate the current price of each $1 000 000 bond correct to the nearer cent.(b)Calculate the duration of each bond. (Show 4 places of decimals).(c)Calculate the convexity of each bond. (Show 4 places of decimals).(d)You have just heard that immediately after issue the yield on the bond has increased from 6% per annum compounded half-yearly to 6.2% per annum also compoundedhalf-yearly.Using the formula (and/or the method) applied in (a) above calculate the new bond price and the resultant price change assuming that there are still 3 years until the bond’s maturity.(e)Before the increase in yield in part (d) above took place calculate the value of the bond at the duration date as calculated in (b) above.
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