1. The treasury has just issued a 5-year par bond (Price of $100) with an annual coupon of 10%.

a) Compute Modified Duration of the bond using both a numerical approximation- DV01/P and by using the actual formula for (dP/dy)/P.

b) Use both the duration measures to predict the change in price if the rates increase by 100 basis points.

c) Compute the convexity of the bond using the numerical approximation.

d) Now use both numerical duration and convexity again to compute the change in price when rates increase by 100 basis points. Is the prediction better than what you computed in Part (b)? Why?