Consider a two-year 8% coupon bond with a face value of $1000. Suppose that the yield on the bond is 10% per annum with continuous compounding. Coupons are semi-annual.

You perform the following calculations:

Time (years)	Cash Flow ($)	Present Value of Cash Flow ($)	Weight (PV of Cash Flow / Bond Price)	Time x Weight, years	Time2 x Weight, years2
0.5	40	38.05	38.05/960.15 = .040	0.5 (0.040)	(0.5)2 (0.040)
1.0	40	36.19	.038	1.0 (.038)	(1.0)2 (0.038)
1.5	40	34.43	.036	1.5 (.036)	(1.5)2 (0.036)
2.0	1040	851.48	.887	2 (.887)	(2.0)2 (0.887)
Total		960.15		1.88	3.68

Suppose the yield increases by 200 basis points (2%). Calculate the new value of the bond using both duration and convexity.

	a.	958.34
	b.	965.31
	c.	924.66
	d.	973.98