Question: Hello! Can you help with this question please! Consider a 4-year bond with 6% p.a. coupon rate. The par value of the bond is 100,

Hello! Can you help with this question please!

Consider a 4-year bond with 6% p.a. coupon rate. The par value of the bond is 100, and the discount rate (yield to maturity) is 5%. The bond pays coupons on an annual basis.

1A Calculate the duration of this bond assuming an interest rate shock of +/-20 bps (+/- 0.20%).

1B Then calculate the estimated percentage change in the bonds price using duration, if yields increase by 20bps.

1C Then calculate the convexity adjustment for this bond for an interest rate shock of +/-20 bps (+/- 0.20%). Use the convexity adjustment to calculate the estimate price change in the bonds price if yields increase by 20bps.

1D Which estimate (using duration or using both duration and convexity) is closer to the actual change in the bonds price? Explain the magnitude of the difference between the two. estimations.

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