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Consider a three - year option - free bond paying an 1 1 % percent annual coupon and selling at par value. Required: a )
Consider a threeyear optionfree bond paying an percent annual coupon and selling at par value.
Required:
a Calculate the duration of the bond.
b If the yield to maturity is expected to change by bp in either direction:
i Using the duration rule, determine the price of the bond at the new yields.
ii Assuming the convexity of the bond is use the durationwithconvexity rule to determine the price for the bond at the new yield.
iii. Compare the results obtained in part i and ii What observations do you make?
Show all workings. Roundoff all final answers to two decimal places. You do not need to include or show the formulas used in your answer.
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