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Consider a six-year, $1,000 par value, zero-coupon bond yielding 8 percent. (15 points)

1- What is the duration of this bond? (1 point)

a. 4 years

b. 5 years

c. 6 years

d. 4.5 years

e. 5.25 years

2- If interest rates increase to 9 percent, what is the amount of error (Pduration Pmarket) in the price estimate using the duration relationship versus the true bond price determined in the market? (3 points)

a. -$1.11

b. +$2.47

c. +$1.16

d. -$2.47

e. -$1.16

3- What is the convexity factor (CX) for this bond? (6 points)

a. 36

b. 28

c. 130

d. 25.72

e. 312

4- What is the change in price caused by convexity in the duration-convexity model for an interest rate increase to 9 percent? (5 points)

a. $0.882

b. $1.134

c. $4.096

d. $0.810

e. $9.831