An 11-year 7% p. Treasury bond (coupon payable half-yearly) is available for purchase at a market yield to maturity of j2 = 6% p.

An 11-year 7% p.a. Treasury bond (coupon payable half-yearly) is available for purchase at a market yield to maturity of j2 = 6% p.a.

a. Find the bond's price (per $100 face value, rounded to three decimal places) at this yield. Include in your answer

• a fully labelled cash flow diagram (drawn from the perspective of the bond issuer),

• your chosen valuation date and

• an equation of value.

b. Find the bond's price (to three decimal places) at a nominal annual yield two hundred basis points higher.

c. Using the phrase 'par bond' answer the following: how do you know your answers in parts a and b are reasonable?