1. Duration & Convexity Revisited: You have a 4-year 50 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 Discount Rate Factor PV Cash Flows $- Duration Convexity 1 Cash Flows 50 50 50 1050 4.250 4.75$ 5.258 5.209 .9185 .8672 8106 45.93 43.36 851.13 91.86 130.08 3404.52 4 Ytm = A) Calculate the discount factors, PV of the bond, $-duration (delta), Macaulay Duration and $-convexity. Put the values in the table above. Use the following formulas to calculate delta (dollar duration), Macaulay Duration and $-convexity: A$ = [1 RV (K1)] + [2 PV (K2)] + [3 PV (K3] + - + [T PV (KT) 1 DMac = A$/B B) Assume the term structure makes a 200 bps shift upward. Estimate the new price of the bond using the duration relationship. Assume the reference rate is the current won. C) For the same 200 bps upward shift, estimate the new price of the bond using your answer in "B" above and the convexity correction. The duration relationship with the convexity correction states: AP = -4$ (16]+1$ (137) 1. Duration & Convexity Revisited: You have a 4-year 50 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 Discount Rate Factor PV Cash Flows $- Duration Convexity 1 Cash Flows 50 50 50 1050 4.250 4.75$ 5.258 5.209 .9185 .8672 8106 45.93 43.36 851.13 91.86 130.08 3404.52 4 Ytm = A) Calculate the discount factors, PV of the bond, $-duration (delta), Macaulay Duration and $-convexity. Put the values in the table above. Use the following formulas to calculate delta (dollar duration), Macaulay Duration and $-convexity: A$ = [1 RV (K1)] + [2 PV (K2)] + [3 PV (K3] + - + [T PV (KT) 1 DMac = A$/B B) Assume the term structure makes a 200 bps shift upward. Estimate the new price of the bond using the duration relationship. Assume the reference rate is the current won. C) For the same 200 bps upward shift, estimate the new price of the bond using your answer in "B" above and the convexity correction. The duration relationship with the convexity correction states: AP = -4$ (16]+1$ (137)