Please help answer the sample test question blew base on the information in image.

Duration Sample A demonstration of calculating duration and convexity Lets assume the following two bonds Bond A rice Coupon: Maturity: YTM: Bond B Price Coupon: Maturity: YTM 104.0 7.00% 82.5 4.00% 5 Years 8 Years 6,06% 6.88% Bond A is trading at 104, 104% of par or $1,040 per bond. This gives the investor a potential YTM of 6.06% Bond B is trading at 82.5, 82.5% of par or $825 per bond. This gives a potential investor a YTM of 6.88%. Before an investor buys either bond, an investor would first check the bond's sensitivity to changes in market rates. So the investor calculates duration Duration To calculate duration, you need values Vo, V and V. To get these values you assume a small change in yield and then calculate the value of the bond given the small change. The small change in yield is designated dy. Lets assume 0.25% for the value ?? Bond A Bond B V,-Bond at YTM of 6.06%- V.-Bond at YTM of 5.81%- Vi-Bond at YTM of 6.31%- $ 1,040.00 $ 1,050.97 $ 1,029.17 Vo-Bond at YTM of 6.88% = V.-Bond at YTM of 6.63% V. Bond at YTM of 7.13% $ 825.00 $ 838.67 $ 811.59 We have calculated all the values we need. We can now calculate duration Duration: 4.19 Duration 6.56 Our calculations show that Bond A will change 4.19% for every 1.00% change in market rates. Bond B will change 6.56% for every 1.00% change in market rates But duration is only good for small changes in market rates. Suppose we thought market rates were going to rally or drop by 1.50%? Using duration we get Bond A % Change-Duration x ?y x 100 = % Change =-Duration x-0.015 x 100 = Bond B % Change Duration x ?y x 100 % Change =-Duration x-0.015 x 100 = 6.29% 9.85% Bond B would be perferably to own since it's appreciation is much greater. But given such a large change in rates, we need to calculate convexity to insure we have an accurate measurement Remember to calculate using the same Ay you used to calculate duration Bond A Bond B Convexity = 10.6268 25.4920 nvexi