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2. Computer assignment: • Using the spreadsheet "homework1.xls" calculate the following: 1. actual price change for yield/interest rate changes ranging from -7% to +6.5%. 2. estimated price change from duration. 3. estimated price change from convexity. 4. plot all three on the same graph. • The first spreadsheet for a 10-year bullet bond making 20 semiannual coupon pay- ments has been done for you. The formulas are all in the spreadsheet. - Specifics: 10-year, 14% coupon bond with semiannual coupon payments, FV=$10,000 and yield-to-maturity of 14% (i.e., at par). • The second spreadsheet for a 10-year barbell bond is for you to complete. There are many fewer cashflows here since the barbell bond only pays coupons in year 1 (periods 1 and 2) and year 10 (periods 19 and 20). - Specifics: 10-year bond with coupon of 60% in year 1 and 60% in year 10, with no coupon payments in between (e.g., a barbell), FV=$10,000 and yield-to-maturity of 9.8%. • I have done most of the work for you. The charts/graphs will automatically be updated and the interest rate changes are provided. Also, the forumulas from the bullet bond spreadsheet can be used for the barbell bond, BUT make sure you use the appropriate cash flows for the barbell bond. This exercise will give you practice on computing duration and convexity and using it to estimate price changes of bonds. (hint: to be sure you are calculating things correctly, the duration on the barbell bond should be about the same as the bullet bond). To be turned in: 1. A copy of the spreadsheet and graph for the barbell bond. 2. Answer to the following question: Why does the barbell bond have a higher price than the bullet bond when they have roughly the same duration (i.e., same senstivity to the level of the interest rate)? For fun: Try to play around with the numbers in the spreadsheets to give yourself practice and intuition for bond pricing and sensitivity to interest rate changes and yields./n

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