Question: Suppose settlement is on a coupon payment date, so / = 0. For a 10-Year, 6% annual payment bond with face value =$100. Assume the

Suppose settlement is on a coupon payment date, so / = 0. For a 10-Year, 6% annual payment bond with face value =$100. Assume the yield-to-maturity is = 5%.

A) Calculate bond price , Macaulay duration, and convexity by filling in the following blanks:

1. = ( = 100, = 6%, = 10, = 5%) =______________. 0

2. =______________, 3. =______________.

Suppose we have a small interest rate (yield) move: = +0.01%. Calculate the new bond price

for =+=5.01%. Then calculate the price change: = . Finally, use ++ +0

Duration and Convexity calculated in part a to approximate the price change . Which approximation is closer to the real ? You should simply follow the steps below:

1. = ( = 100, = 6%, = 10, = 5.01%) = _____________. +

2. = = ______________ ______________ = ______________. +0

3. = = (+0.01%) ______________ ______________ = ______________. 10

4. = + 1 ()2 = ______________ + 0.5 (0.01%)2 2120

______________ ______________ = ______________.

5. ______________ (choose or ) is closer to . 12

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