TypeTreasuryCorporateCoupon2.25%3.00%Yield to Maturity2.13%3.22%Settlement Date12/24/1612/24/16Maturity Date12/15/2312/15/23

(a) What is the price of each bond?

(b) What is the spread of the corporate bond?

(c) What is the value of a basis point (PV01)?

(d) Calculate the Macauley duration and the modified duration.

(e) Compute the approximate duration using the shortcut formula by changing yields by 20bp and compare with the answer in (d) above.

(f) Compute the approximate convexity using the shortcut formula by changing yields by 20bp.

(g) Using duration, estimate the price of the bond for a 100bp increase in interest rates.

(h) Would the estimate be improved by using the convexity measure as well?

(i) Does the use of duration alone overestimate or underestimate the price when rates increase?

(j) Does the use of duration alone overestimate or underestimate the price when rates decrease?