Consider a 2-year bond with face value 1000, coupon of $6.25, and yield of 2.64% (annual yield), done semi-annually (so n=4?). Also consider a 10-year bond with face value 1000, coupon of $11.25, and yield of 4.35% (annual yield), done semi-annually (so n=20?).
(a) Compute the prices (equation is P = C/(y/2) x [1-1/(1+y/2)^n] + F/(1+(y/2)^n), modified durations (using the technique of computing bond prices around that specific yield), and convexities.
(b) Using the price approximation based on both duration and convexity, plot the relationship between yields and prices for yields spanning +/- 2% around the yield of each security (use a lower bound of 0 if needed).
(c) Which bond seems to carry the most risk? Why?
Please show your work/steps