Consider a 10 year bond with a coupon rate of 7% and annual coupon payments. Draw a graph showing the relationship between the price and the interest on this bond. The price should be on the y-axis and the interest rate on the x-axis.

1. To compute the various prices, consider interest rates between 2% and 12% (use 0.5% increments). So your x-axis should go from 2%, then 2.5%... until 11.5% and then 12%. Is the relationshiplinear (i.e. is the slope constant)?Start at 7%. If interest rates go up or down by 0.5% is the price changing by the same amount? What type of relationship do we observe between prices and interest rates (liner, concave, convex or something else)

2.

consider the same bond with 10 year maturity, a face value or $1,000, a coupon rate of 7% (coupon is paid annually) and assume that the yield to maturity on the bond is 7%. Compute the duration of this bond.

3. Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a yield to maturity of 7% for maturities of 2 to 18 years in 1-year increments (so here we are going to vary the time to maturity and see how duration changes if N=2, 3 ... etc.). What happens to duration as maturity increases?

4.Compute the duration of a bond with a face value of $1,000, a coupon rate of 7% (coupon is paid annually) and a maturity of 10 yearsas the interest rate (or yield to maturity) on the bond changes from 2% to 12% (consider increments of 1% - so you need to compute the duration for various yields to maturity 2%, 3%, ..., 12%) . What happens to duration as the interest rate increases?