16. A borrower has a loan of $100,000 repaid with level annual payments at the end of renegotiate or prepay the loan at any time without penalty. At the time the tenth each year for 20 years at an effective interest rate of 8%. The borrower can regular payment is made, if the market interest rate rises, the borrower will still repay the loan as originally scheduled. However, if it falls, the borrower will repay the loan with five level annual payments at the end of each following five years. Assume a 1% increase and a 1% decrease in the interest rate. a) Calculate the effective duration. b) Calculate the effective convexity.

16. A borrower has a loan of $100,000 repaid with level annual payments at the end of each year for 20 years at an effective interest rate of 8%. The borrower can renegotiate or prepay the loan at any time without penalty. At the time the tenth regular payment is made, if the market interest rate rises, the borrower will still repay the loan as originally scheduled. However, if it falls, the borrower will repay the loan with five level annual payments at the end of each following five years. Assume a 1% increase and a 1% decrease in the interest rate. a) Calculate the effective duration. b) Calculate the effective convexity