For a 5-year, 6% (annual coupon payment) bond, trading to yield 7%, calculate the approximate percentage price change using duration and convexity adjustment if yield increases by 100 bps from the current 7% yield to 8%.

1. Compute the Macaulay Duration and Modified Duration;

2. Compute the Convexity and Dollar Convexity;

3. What is the percentage price change due to both the duration and convexity?

4. Compare the percentage price change the DCF approach with that as calculated with duration and convexity, how much is the difference? (Note you have to compute the percentage price change using the DCF approach with 7% and 8% for the discount rate).