Since the yield change is rather large, we need to make the convexity correction. As we see, the predicted price from the duration alone is far off the actual price, while the duration-with-convexity price is more accurate.(the choice of question9)

A five-year bond with a face value of $1000 and 8% coupon at the end of each year yields 8%. Using annual compounding, what is the bond's price? QUESTION 2 What is the modified duration of the bond above? QUESTION 3 Using the modified duration to calculate the impact of yield changes, what happens to the bond price if interest rates go down by 0.2%? The bond price goes up by 0.80%. The bond price goes down by 0.80%. The bond price remains unchanged. None of the answers. QUESTION 4 o The actual change to the bond price is ... larger because of convexity. smaller because of convexity. exactly the same as found above. unknown. A newly issued bond has a face value of $1000, a maturity of 10 years and pays a 5.5% coupon rate (with coupon payments coming once annually). The bond sells at par value. Use annual compounding to find the modified duration of the bond. QUESTION 7 Immediately after your purchase, interest rates increase from 5.5% to 6.5%. What is the predicted new price of the bond, using modified duration? (If you're unsure of your answer in the first problem, use a modified duration of 7.50 years.) QUESTION 8 Using the modified duration and a convexity of 72.31, compute the new price of the bond with the duration-with-convexity rule. Again, if you are unsure of your answer for the modified duration, use 7.50 years. QUESTION 9 The actual price of the bond, using a financial calculator, after the change to interest rates is $928.10. Select the appropriate statement below. Even though the yield change is rather large, we do not need to make the convexity correction. As we see, the predicted price from the duration alone is quite close to the actual price. We can freely choose which method we prefer to approximate the price impact of yield changes. After all, the two predicted prices (with our without convexity) are quite similar. Not enough information