The bond has a 4.5% coupon (paid annually), $1000 par amount, and matures in February 15, 2025. Assume that the coupon in February 15, 2019 has just passed, and the next coupon is exactly 1 year away (February 15, 2020) from today

Start by downloading the spot rates for various maturity COUPON Treasury STRIPS from the Wall Street Journal (see attached excel file). Next, plot the spot rate curve of STRIP securities corresponding to cash flows of the Gamble bond using the Asked Yield column. Include the [clearly labeled] plot in the Word document. (Hint: the first observation will be the Ask Yield on a stripped coupon interest that matures February 15, 2020). 2. Calculate the price and YTM of the bond. Assume that this bond has similar risk characteristics to the Treasury STRIPS. Is the bond trading at a premium or discount? Explain why. Under what conditions will the investor realize the YTM? 3. Calculate the duration, modified duration, and convexity of the bond using the present values derived in question 2. 4. Using the answers above, calculate what will happen to the price of the bond when interest rates fall 75 bp (.75%) and 150 bp (1.5%). Use duration rule and duration rule + convexity. Which is a better predictor of price change?

99.916 99.916 0.006 2.33 99.811 99.812 0.006 2.36 99.615 99.617 0.006 2.36 99.406 99.409 0.003 2.39 99.316 99.319 0.003 2.36 99.217 99.22 0.002 2.39 2019 May 15 2019 May 31 2019 Jun 30 2019 Jul 31 2019 Aug 15 2019 Aug 31 2019 Sep 30 2019 Oct 15 2019 Oct 31 2019 Nov 15 2019 Nov 30 2019 Dec 15 2019 99.018 99.022 0.001 2.39 98.877 98.881 0.001 2.49 98.803 98.807 unch. 2.44 98.727 98.733 -0.001 2.39 98.612 98.618 0.011 2.42 98.497 98.503 -0.002 2.44 98.397 98.404 0.01 2.44 99.916 99.916 0.006 2.33 99.811 99.812 0.006 2.36 99.615 99.617 0.006 2.36 99.406 99.409 0.003 2.39 99.316 99.319 0.003 2.36 99.217 99.22 0.002 2.39 2019 May 15 2019 May 31 2019 Jun 30 2019 Jul 31 2019 Aug 15 2019 Aug 31 2019 Sep 30 2019 Oct 15 2019 Oct 31 2019 Nov 15 2019 Nov 30 2019 Dec 15 2019 99.018 99.022 0.001 2.39 98.877 98.881 0.001 2.49 98.803 98.807 unch. 2.44 98.727 98.733 -0.001 2.39 98.612 98.618 0.011 2.42 98.497 98.503 -0.002 2.44 98.397 98.404 0.01 2.44