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(a) An asset will provide two cash inflows: $10,000 in two years, and $25,000 in 10 years. The asset is currently priced at 6% effective
(a) An asset will provide two cash inflows: $10,000 in two years, and $25,000 in 10 years. The asset is currently priced at 6% effective per annum. (i) Find the Macaulay duration and modified duration, expressed in years. [4] (ii) Estimate the price when rate changes to 5.9%, using only modified duration. [3] (iii) Estimate the price when rate changes to 5.9%, using both modified duration and convexity. [5] (iv) Which of the estimates in Parts (ii) and (iii) is better? Explain your answer. [3]
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