1. Calculate the requested measures for bonds A and B (assume that each bond pays interest semiannually) A B Coupon 8% 9% Yield to maturity 8% 8% Maturity (Years) 2 5 Par $100 $100 Price $100 $104.055 a. Price value of a basis point b. Macaulay duration c. Modified duration d. Convexity

2. For bonds A and B in Question 1: a. Calculate the actual price of the bonds for a 100-basis-point increase in interest rates. b. Using duration, estimate the price of the bonds for a 100-basis point increase in interest rates. (Note: Please estimate the change of bond price first, then calculate the new price.) c. Using duration and convexity measures, estimate the price of the bonds for a 100-basis point increase in interest rates Keys: 1.

a. Price value of a basis point $0.0181 per $100 for A; $0.0416 per $100 b. Macaulay duration 1.8875 years for A; 4.1542 years for B c. Modified duration 1.815 years for A; 3.994 years for B d. Convexity 4.277 for A, 19.764 for B

2.

a. Calculate the actual price of the bonds for a 100-basis-point increase in interest rates. 98.21 for A, $100 for B b. Using duration, estimate the price of the bonds for a 100-basis point increase in interest rates. (Note: Please estimate the change of bond price first, then calculate the new price.) 98.185 for A, $99.899 for B c. Using duration and convexity measures, estimate the price of the bonds for a 100-basis point increase in interest rates. 98.21 for A, $100.00 for B