Question 5 a) A 4 year bond that pays 7.5% semi- annual coupon was issued when the yield was 8%. If the yield goes down 55 basis point, what would be the predicted price of the bond? b) Consider a 15 year 6.5% semi-annual coupon bond whose duration is approx. 9.50 years when required rate of return (yield to maturity) is 7.58%. Prove that this bond is immunized if you hold it for 9.50 years.   Note: Please show workings normally. Do not show workings in Ms Excel.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.