(a)

For a change in yield to maturity, explain in your own words why the approximate bond

price calculated using duration is always less than the fully recalculated bond price using

the new yield to maturity. Use a diagram with yield to maturity on the horizontal axis and

bond price on the vertical axis to help explain your point.

(b)

Why a Eurodollar futures contract needs to be

tailed in order to hedge the rate paid on a loan that is taken out at a future date. State the

term (or name) for the difference between the FRA (forward rate agreement) rate and

Eurodollar rate. If there were no difference between the Eurodollar rate and the FRA rate,

state who is systematically favoured in a Eurodollar futures contract: the borrower or the

lender