2. The SQL Corporation has issued bonds that pay semiannually with the following characteristics:

Coupon 8%

Yield to maturity 8%

Maturity 15 years

Macaulay duration 10 years

a) Calculate modified duration using the information provided.

b) Explain why modified duration is a better measure than maturity when calculating the bonds sensitivity to changes in interest rates.

c) Identify the direction of change in modified duration if:

i. the coupon of the bond were 4 percent, not 8 percent.

ii. the maturity of the bond were 7 years, not 15 years.

d) Define convexity and explain how modified duration and convexity are used to approximate the bonds percentage change in price, given a large change in interest rates.