a. Use a spreadsheet to answer this question and assume the yield curve is flat at a level of 4%.

Calculate the convexity of a “bullet” fixed-income portfolio, that is, a portfolio with a single cash flow. Suppose a single $1,000 cash flow is paid in year 5.

b. Now calculate the convexity of a “ladder” fixed-income portfolio, that is, a portfolio with equal cash flows over time. Suppose the security makes $100 cash flows in each of years 1–9, so that its duration is close to the bullet in part (a).

c. Do ladders or bullets have greater convexity? P-963