Problem

We have three semiannual corporate bonds just issued (the settlement date is 10/24/2016). The bonds pay interests every six months.

Bond A: 15-year, 5% coupon rate, $1,000 face value

Bond B: 15-year, 7% coupon rate, $1,000 face value

Bond C: 15-year, 9% coupon rate, $1,000 face value.

We assume that current required rate of return from bond investors is 7%. NOTE: These are semiannual bonds.

You are expected to:

1) Calculate the bond values for the three bonds using the built-in PRICE function in Excel.

2) Perform sensitivity analysis of the bond prices to the changes of required rate of return (from 1% to 15%, the incremental change is 1%). Plot the curve "Bond Value vs. Required Return".

3) Perform sensitivity analysis of the bond prices to the changes of time to maturity (from 15 years to 0, the incremental change is 1 year). Plot the curve "Bond Value vs. Time to Maturity".

4) Draw your conclusions based on the above sensitivity analysis results.

5) Compute Macaulay's Duration and Modified Duration for the three bonds. Compare the interest rate risk of the three bonds.