Hello,

Thanks for the solution. But I am trying to figure when to put what.

Can you please put the answers to the questions as they appear and the working for the summary.

Thanks

$1.$ What is the Macaulay duration of this bond? Ans

$2.$ What does convexity measure? Why does convexity differ among bonds? Ans

What happens to convexity when interest rates rise? Why?

$3.$ What is the exact price change in dollars if interest rates increase by $10$ basis points $($a uniform shift$)?$

$4.$ Use the duration model to calculate the approximate price change in dollars if interest rates increase by $20$ basis points. Ans

$5.$ Incorporate convexity to calculate the approximate price change in dollars if interest rates increase by $20$ basis points.

We consider the following zero$-$coupon curve:

Maturity $($Years$)$ Zero$-$ Coupon Rate $\%$

$14\mathrm{.}0$

$24\mathrm{.}5$

$34\mathrm{.}75$

$44\mathrm{.}90$

$55\mathrm{.}0$

$1.$ What is the price of a $5-$year bond with a $$100$ face value, which delivers a $5\%$ annual coupon rate? Ans

$2.$ What is the yield to maturity of this bond? Ans

$3.$ We suppose that the zero$-$coupon curve increases instantaneously and uniformly by $0\mathrm{.}5\%.$ What is the new price and the new yield to maturity of the bond? What is the impact of this rate increase for the bondholder? Ans

$4.$ We suppose now that the zero$-$coupon curve remains stable over time. You hold the bond until maturity. What is the annual return rate of your investment? Ans

Why is this rate different from the yield to maturity? Ans