Your investment banker recommends you invest in a 4-year bond selling for 800. Assuming the bond makes semi-annual payments and has a 6% yield to maturity, you are interested to get more information before you decide to invest.

Required

a)Calculate both the Macaulay and modified duration measures for the bond.

b)Assume now that the yield changes in turn by +3% and -3% in any year. Calculate the effect of the change in the yield on the price of the bond.

c)Explain the difference in percentage change in the bond's price based on convexity and your calculation in part a).Illustrate your answer diagrammatically.