Bond A is a 5-year, 4% coupon US Treasury bond. The term structure is currently flat at 5% per annum. All bonds are denominated at $100 face value per contract and they pay their coupons annually.

(i) Compute the price of bond A. Briefly discuss why bond A is trading at a discount/premium.

(ii) Compute the Modified Dollar Duration of bond A. Briefly discuss the intuition behind this measure.

(iii) Bond B is 5-year, 5% coupon US Treasury bond. Compute its Modified Dollar Duration and briefly discuss how it compares to the Modified Dollar Duration of bond A.

(iv) Suppose that you expect the annual term structure to increase instantaneously to a flat 5%. Compute the expected price change of bond A based on its duration. Briefly discuss how this expected price change compares to the actual price change that would take place if the term structure indeed jumped to a flat 5%.

(v) Suppose that the term structure remains the same during the life of bond A. Briefly discuss how we would expect its price to evolve during this period.