Please show all work. MLK Bank has an asset portfolio that consists of $100 million of...

Please show all work.

MLK Bank has an asset portfolio that consists of $100 million of 30-year bonds with 8 percent coupon rate (coupons are paid annually) and $1,000 face value selling at par.

a) What will be the bonds’ new prices if market yields change immediately by ± 0.05 percent? What will be the new prices if market yields change immediately by ± 1.00 percent?

b) The duration of these bonds is 12.1608 years. What are the predicted new bond prices in each of the four cases using the duration rule? What is the amount of error (difference) between the predicted prices based on duration rule and the actual market values based on bond valuation formula?

Expert Solution

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