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FINN 200 - Assignment 2 Bonds and Duration-You can consult Chapter 8 for guidance *Instructions: Upload your hand-written solution (only) on Ims before Sunday, 24th October 2021 11:55 pm. Question 1: Rameen & Co. needs to raise $15 million, and you as financial analyst for Rameen & Co. are considering to issue 6-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you're evaluating two issue alternatives: A semi-annual coupon bond with a 8 percent coupon rate and a zero-coupon bond. Your company's tax rate is 35 percent. a) How many of the coupon bonds would you need to issue to raise the $15 million? How many of the zeroes need to be raised? (5) b) In 6 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? (5) c) Calculate Macaulay duration and Modified Duration for both bonds. Also explain the interpretation of these numbers. (20) Refer to the reading Duration and Convexity uploaded on Ims. d) Explain why modified duration a better measure is than maturity when calculating the bond's sensitivity to changes in interest rates. (5) e) Assuming the bond's YTM goes from 10 percent to 9.5 percent, calculate an estimate of the price change. (5) f) Identify the direction of change in modified duration if: I. the coupon of the bond were 4 percent, not 8 percent. (5) II. the maturity of the bond were 7 years, not 15 years.(5) FINN 200 - Assignment 2 Bonds and Duration-You can consult Chapter 8 for guidance *Instructions: Upload your hand-written solution (only) on Ims before Sunday, 24th October 2021 11:55 pm. Question 1: Rameen & Co. needs to raise $15 million, and you as financial analyst for Rameen & Co. are considering to issue 6-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you're evaluating two issue alternatives: A semi-annual coupon bond with a 8 percent coupon rate and a zero-coupon bond. Your company's tax rate is 35 percent. a) How many of the coupon bonds would you need to issue to raise the $15 million? How many of the zeroes need to be raised? (5) b) In 6 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? (5) c) Calculate Macaulay duration and Modified Duration for both bonds. Also explain the interpretation of these numbers. (20) Refer to the reading Duration and Convexity uploaded on Ims. d) Explain why modified duration a better measure is than maturity when calculating the bond's sensitivity to changes in interest rates. (5) e) Assuming the bond's YTM goes from 10 percent to 9.5 percent, calculate an estimate of the price change. (5) f) Identify the direction of change in modified duration if: I. the coupon of the bond were 4 percent, not 8 percent. (5) II. the maturity of the bond were 7 years, not 15 years

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