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Always show your work to get full credit (do not just write down answers). Keep as many decimal places as needed. All bond coupon rates are expressed \"per annum\" if not stated explicitly, but the coupon payment frequency may not always be per annum. 1. [3 points total]: Calculate the requested measures in parts (a) through (d) for bond B (assume bond pays coupon interest semiannually): Coupon Yield to maturity Maturity (years) Par Bond A 8% 8% 2 $100.00 Price $100.00 Bond B 9% 8% 5 $100.0 0 $104.055 (a) [0 pts] Compute the modified duration ( done in HW #2 ) ->3.99 years (b) [1 pt] Compute the approximate duration using the duration approximation formula, and by changing yields by 20 basis points. Compare your answer with those calculated in part (a). (c) [1 pt] Compute the convexity. (d) [1 pt] Compute the approximate convexity using the convexity approximation formula and by changing yields by 20 basis points. Compare your answers to the convexity measure calculated in part (c). 2. [6 points total] Homework lecture 1 revisited. Answer in the context of one required yield (NOT multiple spot rates) Bond A is a 2 year, $100 par value US govt bond, coupon=5% (per annum), payable annually. It costs $100 today. Bond B is a 2 year, $100 par value US govt bond, coupon=10% (per annum), payable annually, but costs $109 today. (a) [ 2 points] assume you are a bond portfolio manager with a required yield of 5% and no set investment horizon. Which bond do you prefer to buy and why? As a first approximation, assume modified duration and convexity of both bonds are the same. (b) [ 2 points] assume you are a bond portfolio manager with a required yield of 5% and no set investment horizon. Which bond do you prefer to buy and why? Relax the duration assumption from part (a), i.e. assume only the convexity of the two bonds is the same. (c) [ 2 points] assume you are a total return investor with investment horizon of two years. Which bond do you prefer to buy and why? REMEMBER: if you are a \"bond portfolio manager\" at a large asset management house (e.g. PIMCO), the general implication is your portfolios are marked to market daily, so will face \"price volatility.\" Further, you would at very least consider three independent factors before investing: 1. \"Fundamentals\