1. **Problem Statement:** We need to value fixed income securities: a 10-year Malaysian Government Security (MGS) with a 3.5% coupon, and a 7-year corporate bond from XYZ Berhad with a 4.8% coupon, given the OPR increase from 3.00% to 3.25%. We will calculate price, yield to maturity (YTM), current yield, duration, convexity, and sensitivity to interest rate changes. 2. **Bond Valuation Formulas and Concepts:** - Price of a bond is the present value of its future cash flows (coupons and principal): $$P = \sum_{t=1}^N \frac{C}{(1+y)^t} + \frac{F}{(1+y)^N}$$ where $C$ is the coupon payment, $F$ is face value (assumed 100), $y$ is yield per period, and $N$ is number of periods. - Current Yield = $\frac{\text{Annual Coupon}}{\text{Price}}$ - Yield to Maturity (YTM) is the discount rate $y$ that equates price to present value of cash flows. - Duration measures sensitivity of bond price to interest rate changes: $$D = -\frac{1}{P} \frac{dP}{dy}$$ - Convexity measures curvature of price-yield relationship: $$C = \frac{1}{P} \frac{d^2P}{dy^2}$$ - Price sensitivity to a 1% (0.01) change in yield: $$\Delta P \approx -D \times \Delta y + \frac{1}{2} C \times (\Delta y)^2$$ 3. **Calculations for MGS (10-year, 3.5% coupon, OPR 3.25%):** - Coupon $C = 3.5$ (assuming face value 100) - Yield $y = 3.25$ - Number of periods $N=10$ Calculate price $P$ by discounting coupons and principal at 3.25%. 4. **Calculations for XYZ Berhad Corporate Bond (7-year, 4.8% coupon):** - Coupon $C=4.8$ - Yield $y$ assumed close to OPR + credit spread (not given, assume 4.8% as coupon for simplicity) - Number of periods $N=7$ Calculate price $P$ similarly. 5. **Duration and Convexity:** Use Excel or financial calculator functions to compute duration and convexity for both bonds. 6. **Sensitivity Analysis:** Calculate price changes for a 1% increase and decrease in yield using duration and convexity. 7. **Interpretation:** - Higher coupon bonds generally have lower duration. - Corporate bonds usually have higher yields due to credit risk. - OPR increase generally lowers bond prices. 8. **Recommendation:** Based on risk-return trade-off, duration, and sensitivity, allocate funds between MGS (safer, lower yield) and corporate bonds (higher yield, higher risk). Sukuk allocation depends on ESG preferences and yield comparability. **Final Note:** Use Excel functions like PRICE, YIELD, DURATION, and CONVEXITY for precise calculations.