Question: Consider two bonds with $1,000 face values that carry coupon rates of 5%, make annual coupon payments, and exhibit similar risk characteristics. The first bond

Consider two bonds with $1,000 face values that carry coupon rates of 5%, make annual coupon payments, and exhibit similar risk characteristics. The first bond has two years to maturity whereas the second has three years to maturity. The yield to maturity of these investments is 5%. If the yield to maturity rises by half a percentage point, what are the respective percentage price changes of the two bonds? Find the exact answer and approximate answers using the duration rule and the duration-convexity rule. Discuss the quality of the approximation.

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