Hand calculation

Question 5 (20 marks) (a) An asset will provide two cash inflows: $10,000 at the end of one year, and $30,000 at the end of 8 years. The asset is currently priced at 5% effective per annum. (i) Compute the price of the asset at 5% effective per annum. [2] (ii) Find the Macaulay duration and modified duration. [6] (iii) If the rate changes to 5.1%, the price of the asset can be estimated using (1) modified duration (first-order approximation), or (2) modified duration and convexity (second- order approximation). Which method would give a better estimate? Without per- forming any computations, explain your answer. [2]