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Question 24. Consider a bond with duration 2.5 that is selling at a price of $1000: - Suppose the yield increases from 6 to 7

Question 24. Consider a bond with duration 2.5 that is selling at a price of $1000:

- Suppose the yield increases from 6 to 7 percent. Approximately what will the new price be?

- Suppose now you also calculate that the convexity of the bond is 9.5. Now approximately what will the new price be?

- Suppose the yield on a 1-year zero-coupon bond is 5%, and the yield on a two year zero coupon bond is 8%. Suppose the expected short rate next year is 9%. What is the liquidity premium?

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