(use Excel to do this question)

(a) Consider the 3-year bond , if you were told that F = 1,250, C = 125 and the YTM = 0.04; what will be the price (P), Macauley Duration (MD) and Convexity of this bond?

(b) Using the information in part (a) find the actual change in P when the YTM changes from 0.04 to 0.03 AND the quadratic approximation to this change using the formula below. Briefly comment on the quality of this approximation: P = MMD.P.[YTM] + Convexity.P.[YTM]2 [MMD is the modified Macauley Duration]