Problem 2.
Today, March 5th, 2014 (that is the settlement date) you bought ten newly issued $1 000 face value bonds with
2.25% annual coupon and maturity on March 5th, 2021. You decided to do some financial engineering, stripped
the coupons and sell them to you friend (e.g. you will pass coupons to your friend instead of keeping for
yourself). However, you intend to receive Face Value of the bonds by yourself. As of today, the prevailing
yield on bonds of similar risk is 1.274%.
A. How much should you charge your friend for the future coupons?
B. What is your contribution to the purchase price?
C. What is the duration of the bond?
D. What is the duration of the stripped bond?
E. What is the duration of the coupon stream?
STATE the appropriate method of the solution and why you use it.
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