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It would be greatly appreciated if you are able to walk me through the steps! You are presented with bond with the following characteristics: Bond

It would be greatly appreciated if you are able to walk me through the steps!

You are presented with bond with the following characteristics:

Bond A:

Maturity = 2 years

Coupon = 6%

Yield = 6%

Price =100

Coupon is paid semi-annually and your investment horizon is 1.5 years. a) What is the modified duration of this bond? (5 marks) b) What is the convexity of this bond? (8 marks) c) If the yield after 6 months is expected to fall to 5.5% and then to 4.5% from the beginning of year 2, what would be your holding period return, price appreciation/depreciation, re-investment income and coupon income from this bond? (9 marks) d) Explain why the bonds price in c) has appreciated/depreciated? (3 marks)

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