This question consists of three parts A, B & C. (20 marks) (A) A company has issued bonds with 10 years to maturity, an 7% coupon rate, and $1,000 face value. If your required rate of returi is 8% and the bonds pay interest semi- annually, what is the value of these bonds? What is the conversion factor for this bond? (8 marks) (B) Three-month hedge is required for a $8,000,000 portfolio. Duration of the portfolio in 3 months will be 7.8 years. The 3-month T-bond futures price is 94-02 so that contract price is $94,062.50. The duration of cheapest to deliver bond in 3 months is 9.2 years. What is the number of bond futures contracts to be shorted? (6 marks) (C) An interest rate is 8% per annum with continuous compounding. What is the equivalent rate with semiannually compounding? (6 marks)
