Assume a 7-year, $5,000 par value bond paying a 12% coupon annually and a YTM of 10%. The prime rate is 4%. There will be a charge of $20 in fees and will have a 14% compensating balance imposed. The reserve requirement is 11%. The Treasury Note is yielding 1.25%. If the loan defaults, the bank will recover 65% of its money. Assume there is a concern of an increase in yields of 4%. The ROE (cost of funds) is 6.5%.

This loan is combined in a portfolio with a second loan that contains a face value of $3,000. This second loan has a Moody's KMV Return of 3.5% and Moody's KMV Risk of 12%. The correlation of the two loans is -0.65 and the bank is willing to take a maximum of a 20% loss. The national average allocation for the first loan is 45% and the national average allocation for the second loan is 55%.

What is the Duration, Modified Duration and Dollar Duration of this bond?

What is the New Price that is predicted by the Duration Model?

What is the Convexity (CX) Factor?