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Please answer all parts for the following question (a) Calculate the Macaulay duration of a 12-year mortgage with quarterly installments. Interest rate is 12% compounded
Please answer all parts for the following question
(a) Calculate the Macaulay duration of a 12-year mortgage with quarterly installments. Interest rate is 12% compounded quarterly.
(b) Calculate the percentage change in the sum of the present values of the installments if interest rate drops from 12% to 11.4% (i.e., a drop of 60 basis points) by
(i) using the modied duration approximation,
(ii) an exact calculation.
(c) Compare the answers obtained in (i) and (ii). Can the discrepancy be reduced by a convexity correction?
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