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Consider the following three bonds.

Coupon Rate Face Value Time to maturity (in years) CouponPayments per year

Bond A. 0 $1000 t = 2 0

Bond B. 20% $1000 t = 2 1

Bond C 0 $1000 t = 3 0

For Bond B the first coupon is paid in exactly one year (at t = 1).

A. What are the current (t =0) prices of these bonds if the effective annual yield on all bonds in 5 percent?

Price of Bond A = ________________.

Price of Bond B = _______________.

Price of Bond C = ________________.

Please show work

B. If the yield curve shifts up to 6 percent (in the next nanosecond) what are the t = 0 prices of these three bonds.

Price of Bond A = _______________.

Price of Bond B = _______________.

Price of Bond C = ________________.

Please show work

C. Comparing Bond A and Bond B which of these two bonds has the larger percentage change in price given the shift in the yield curve?

Bond A Bond B

Please show work.

D. What can you conclude about the amount of price risk that exists for zero- versus non-zero coupon bonds with the same maturity date?

E. Comparing Bond A and Bond C which of these two bonds has the larger percentage change in price given the shift in the yield curve?

Bond A Bond C

F. What can you conclude about the amount of price risk that exists for longer-term versus shorter-term zero-coupon bonds?

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