Your portfolio contains 40% of Bond I, 20% of Bond II, 20% of Bond III and 20% of Bond IV. Details of the four bonds are given below: I. 10-year zero coupon government bond, par value $1000, current price = $613.91 II. 10-year zero coupon corporate bond, par value $1000, default premium= 2% III. 5 year 15 % coupon corporate bond, par value $1000, annual coupon payments, default premium = 9% and YTM for similar government bond is 6% IV. 5 year 15% government coupon bond, par value $1000, annual coupon payments, YTM=6

What is the convexity of Bond I? If Bond Is yield increases by 1%, what is the price of Bond I based on duration-with-convexity rule? (4marks)

f) Briefly explain how duration and convexity affect your bond investments.