Solve the following questions without using Excel. A 5 year bond with a coupon of 7%, that pays interest annually, has its next coupon due in 12 months. It yields 5% per annum.

a) compute the duration of the bond. Use this to compute approximately how the price of the bond will change if yields rise to 6%.

(b) Compute the convexity of the bond. Use this to obtain a more precise estimate of the change in the price which will occur if the yield rises to 6%.