Consider a 10-year bond with $100 par, paying 6% coupons annually and having a YTM of 5%. a) Build the usual table and find the bonds price at the 5% yield (base case). Now use the table to find the bonds price if the yield shifts by +.1% (10 bps). What is the percent change in price: (PShift PBase)/PBase ? b) Calculate the duration of the bond at the base case yield of 5%. Use duration to approximate the percent price change for the 10 bps yield increase:

What is the error of this prediction? In other words, what is the percent price change from the duration formula minus the actual percent price change from part a) above?

c) Calculate the convexity of the bond at the base case yield of 5%. Use this convexity and the duration from part b) to approximate the percent price change for the 10 bps yield increase. Use:

What is the error of this prediction? In other words, what is the percent change from the duration/convexity formula minus the actual percent change from part a) above?

= E-D* y P AP =-D*Ay+ X[Convexityx (Ay)?] = P