Question

Note: If not otherwise stated, assume that:

• Yield-to-maturity (YTM) is an APR, semi-annuallycompounded

• Bonds have a face value of $1,000

• Coupon bonds make semi-annual coupon payments; however, couponrates (rc) are annual rates, i.e., bonds make a semi-annual couponpayment of rc/2

You must invest $100,000, and the bonds listed below from Ato E are the only investments available today (assume that it ispossible to buy a fraction of a bond in order to invest the full$100,000). The same 6% market interest rate (APR, compoundedsemi-annually) applies to all of these bonds and they have thefollowing additional characteristics:

A. 6 years to maturity and 4% coupon rate (coupons paidannually)

B. 3 years to maturity and 7% coupon rate (coupons paidsemi-annually)

C. 6 years to maturity and 0% coupon rate (discount orzero-coupon bond)

D. 3 years to maturity and 4% coupon rate (coupons paidsemi-annually)

E. 6 years to maturity and 4% coupon rate (coupons paidsemi-annually)

a) Rank these bonds according to their interest ratesensitivities, from the most interest rate sensitive to the leastinterest rate sensitive.

Select one:

ABCDE

CAEDB

CEABD

DBAEC

BDEAC

AECDB

EACBD

CDEAB

b) If you want to benefit from an unexpected decrease inmarket interest rates, which bond would you purchase?

Select one:

A

B

C

D

E

c) If you want to minimize interest rate risk, whichbond would you purchase?

Select one:

A

B

C

D

E

d) What is the duration (in years) of the bond you chosein part c)?

Select one:

0.32 years

2.76 years

2.84 years

5.68 years

5.52 years

2.34 years

1.98 years

3.96 years

NOTE: Please show all the work, without using excel (step bystep with equations) Thanks!