a. Calculate the duration and modified duration for a bond that has a coupon rate of 7% (paid annually), 3 years to maturity, a YTM of 7% and a par value of $1000.
b. Calculate the effect on the price of the bond (in dollars) of a 3% decrease in yield using the duration rule and the convexity correction (assume convexity of 125).
c. Show this difference graphically labeling all axes and relevant components. (Be sure to show the actual price differences and pricing error.)