Q$.$ No$.3$

$($i$)$

You are working as a fixed income analyst in a wholesale bank and is asked to rank the below

three bonds in terms of interest rate risk. Interest rate risk here means the potential price decrease

on a percentage basis given a sudden change in financial market conditions. The increases in the

yields to maturity represent the "worst case" for the scenario being considered.

The modified duration and convexity statistics are annualized. Change in yield is the increase in

the annual yield$-$to$-$maturity. Rank the bonds in terms of interest rate risk. Show the calculations.

$($ii$)$

What Is the Relationship Between Inflation and Interest Rates? Why does inflation increase

interest rates? What is the impact of inflation and interest on your Financial Plan?