1. Duration & Convexity: Kiss Cosmetics Inc. has a 4-year 5% coupon bond (annual coupon payments) with a face value of $1,000. The spot rate term structure is shown in the table below.

Maturity	Spot Rate	Discount Factor	Cash Flows	PV Cash Flows	$-Duration	Convexity
1	4.0%		50
2	4.25%		50
3	4.75%		50
4	5.25%		1050
Ytm =	5.20%

A) Calculate the discount factors, PV of the bond, $-duration (delta), Macaulay Duration, and $-convexity. Put the values in the table above. B) Assume the term structure makes a 200 bps shift upward. Estimate the new price of the bond using the duration relationship. Assume the reference rate is the current ytm.

C) For the same 200 bps upward shift, estimate the new price of the bond using your answer in B above and the convexity correction.

D) Calculate the new price of AC/DCs bond issue using the discount function after the term structure shifted up by 200 bps.

Maturity	Prior Spot Term Structure	New Spot Term Structure	New Discount Function	Bond Cash Flows	PV Cash Flows
1	4.0%	6.0%		50
2	4.25%	6.25%		50
3	4.75%	6.75%		50
4	5.25%	7.25%		1050