A two-year amortizing bond has a coupon rate of 4% and pays its coupons semiannually. Coupon payments are based upon the outstanding face value at the start of the coupon period. It has a face value of 200 and 50 of the face value is amortized every half year. The yield to maturity is 1% per year.

a) Calculate the price of the bond. [5 marks]

b) Calculate the duration of the bond. [5 marks]

c) Calculate the convexity of the bond. [5 marks]

d) If the yield to maturity rises to 4% estimate the price of the bond using both duration and convexity. (Do not calculate the actual new price of the bond) [5 marks]

e) Explain why the duration and convexity are used jointly to provide the estimate of the price change of the bond than just using duration. [5 marks]