A company issues a 5-year step-up note paying semi-annual coupons. The coupon rate starts at 3.70% and goes up by 30 bps every year. The issue sells at $87 (par value is $100).

1. (a)What is the YTM (BEY basis) of this note?(2 marks)
2. (b)Use a 10 bps rate shock to estimate the duration and the convexity of the
3. note.(3 marks)
4. (c)For yields in the range [2% ; 10%] with a step of 0.1%, draw the estimation error of the note price using duration only and duration & convexity, on the same graph.(3 marks)