1. Given the following data on two bonds:

Bond A: Face value $1000; Coupon Rate 4%, market yield 4%; Maturity 12 years

Bond B: Face value $1000; Zero-Coupon, market yield 4%; Maturity 4 years

Convexity of Bond A = 78.90

Convexity of Bond B = 37.49

1. Assume you have a 6-year planning horizon. Compare the risks associated with investing in Bonds A and B.
2. Compute Macaulay and Modified durations for each of the bonds. Compare the two bonds in terms of interest rate sensitivity.
3. Suppose the market yields on the two bonds increases by 10 basis points.
4. Compute the resulting change in the price of each of the two bonds using the duration approximation method only for price adjustment
5. Compute the resulting change in the price of each of the two bonds using the duration and convexity price adjustment technique.
6. Suppose the market yields on the two bonds increases by 125 basis points.
7. Compute the resulting change in prices of the two bonds using the duration approximation only for price adjustment
8. Compute the resulting change in prices of the two bonds using the duration and convexity price adjustment
9. Compare your answers to parts (c ) and (d)