Assume a 2-year Euro-note, with a $100,000 face value, a coupon rate of 10% and a convexity of 4.53. If today's YTM is 11.5% and term structure is at. Coupon frequency is semi-annual and compounding frequency are assumed to be quarterly.

1. What is the Macaulay duration of this bond?

2. What does convexity measure? Why does convexity differ among bonds? What happens to convexity when interest rates rise? Why?

3. What is the exact price change in dollars if interest rates increase by 10 basis points (a uniform shift)?

4. Use the duration model to calculate the approximate price change in dollars if interest rates increase by 10 basis points.

5. Incorporate convexity to calculate the approximate price change in dollars if interest rates increase by 10 basis points