Lucky Star Inc. just issued a bond with the following characteristics:

Maturity = 3 years

Coupon rate = 8%

Face value = $1,000

YTM = 10%

Interest is paid annually and the bond is noncallable.

1. Calculate the bonds Macaulay duration Round "Present value" to 2 decimal places and "Duration" to 4 decimal place.
2. Calculate the bonds modified duration
3. Assuming the bonds YTM goes from 10% to 9.5%, calculate an estimate of the price change without considering convexity.
4. Calculate the convexity of the bond.

Problem 2: Evaluate the following pure-yield pickup swap: You currently hold a 20-yearm AA-rated, 9% coupon rate bond with yield to maturity of 11.0%. As a swap candidate, you are considering a 20-yearm AA-rated, 11% coupon rate bond with yield to maturity of 11.5%, assume reinvestment rate is 11.5% and coupon are paid semi-annually, please fill out the table below and you must show (explain) clearly how numbers in the table are obtained.

	Current Bond	Candidate bond
Dollar investment
Coupon
i on one coupon
Principal value at year end
Total accrued
Realized compound yield
Value of swap:		basis point in one year