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Question 1 (10 marks) Carlos Perrierra is considering the purchase of one of the bonds listed in the following table. Perrierra realises that his…

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Question 1 (10 marks) Carlos Perrierra is considering the purchase of one of the bonds listed in the following table. Perrierra realises that his…

Could you please explain and show working for, Question 1, a) b) and c)

Question 1(10 marks)Carlos Perrierra is considering the purchase of one of the bonds listed in the followingtable. Perrierra realises that his decision will primarily depend on the modified duration ofthe bond, and he believes that interest rates will decline by 0.5% over the next six months.Bond Characteristics for AMP and BNLCharacteristicsAMPBNLPurchase price1017.51017.5Maturity dateJune 1, 2021June 1, 2021Call dateNon-callableJune 1, 2019Annual coupon6.25%7.35%Coupon paymentSemiannualSemiannualModified duration7.355.4Yield to maturity6.02%7.10%Credit ratingAAAAa) Compute the percentage price change for AMP and BNL, if the interest rate declines by0.5% over the next six months.(4 marks)b) Compute the six-month holding period return for AMP and BNL, if the ending price forAMP equals 1055.5 and the ending price for BNL equals 1041.5.(4 marks)c) Although interest rates fell by 0.5%, Perrierra is surprised that the actual price changefor AMP was greater than the price change forecasted by the modified duration, whilethe actual price change for BNL was less than the price change forecasted by modifiedduration. Explain why the actual price change would be greater for AMP and the actualprice change would be less for BNL.(2 marks)

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