You've learned how to compute price elasticity with respect to changes in interest rates (modified duration) of a bond under the flat term structure of interest rates, and parallel shifts in the term structure. In this problem, you are asked to compute the price elasticity of a bond under a non-flat yield curve. The present value (price) of a bond is CF B=LI (149) Now consider the parallel shift of the yield curve by X, i.e. rt+r+ + 2, Vt. Then the price elasticity of the bond with respect to parallel shifts in the yield curve can be written as PE 1 dB = -1 txCE, (1+r)" We can now approximate price changes in response to a small parallel shift Ar in the yield curve as AB-Bx |PE| Ar Note that when the yield curve is flat, the absolute value of price elasticity |PE| equals modified duration. Consider the following term structure, which is upward sloping: 1-yr 2-yr 3-yr 4-yr 5-yr 2.09% 2.3796 2.6396 2.83% 2.9996 A 5-year Treasury note (T-note) has a face value of $100 and a 3.5% coupon rate (assume annual payments). (a) Compute the price of the T-note. (b) Suppose that the yield curve suddenly shifted down by 1.2% (this is a parallel shift, all points on the yield curve shift by the same amount). Compute the new price of the T-note and report the difference between the new price and the original price computed in (a), i.e., Brew - Bold. (c) Compute the absolute value of price elasticity |PE| of the T-note as defined above. You've learned how to compute price elasticity with respect to changes in interest rates (modified duration) of a bond under the flat term structure of interest rates, and parallel shifts in the term structure. In this problem, you are asked to compute the price elasticity of a bond under a non-flat yield curve. The present value (price) of a bond is CF B=LI (149) Now consider the parallel shift of the yield curve by X, i.e. rt+r+ + 2, Vt. Then the price elasticity of the bond with respect to parallel shifts in the yield curve can be written as PE 1 dB = -1 txCE, (1+r)" We can now approximate price changes in response to a small parallel shift Ar in the yield curve as AB-Bx |PE| Ar Note that when the yield curve is flat, the absolute value of price elasticity |PE| equals modified duration. Consider the following term structure, which is upward sloping: 1-yr 2-yr 3-yr 4-yr 5-yr 2.09% 2.3796 2.6396 2.83% 2.9996 A 5-year Treasury note (T-note) has a face value of $100 and a 3.5% coupon rate (assume annual payments). (a) Compute the price of the T-note. (b) Suppose that the yield curve suddenly shifted down by 1.2% (this is a parallel shift, all points on the yield curve shift by the same amount). Compute the new price of the T-note and report the difference between the new price and the original price computed in (a), i.e., Brew - Bold. (c) Compute the absolute value of price elasticity |PE| of the T-note as defined above