Question: (a) For a change in yield to maturity, explain in your own words why the approximate bond price calculated using duration is always less than

(a) For a change in yield to maturity, explain in your own words why the approximate bond price calculated using duration is always less than the fully recalculated bond price using the new yield to maturity. Use a diagram with yield to maturity on the horizontal axis and bond price on the vertical axis to help explain your point.

(b) Explain in your own words the reason why a Eurodollar futures contract needs to be tailed in order to hedge the rate paid on a loan that is taken out at a future date. State the term (or name) for the difference between the FRA (forward rate agreement) rate and Eurodollar rate. If there were no difference between the Eurodollar rate and the FRA rate, state who is systematically favoured in a Eurodollar futures contract: the borrower or the lender.

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