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Assume there is a security that is priced at par (i.e., 100). Its value is expected to rise to 100.50 if rates fall by 25 basis points, and expected to fall to 98 if rates rise by 25 basis points. a. What is the effective duration of this security? b. What is the convexity of this security? c. Explain the meaning of the answers you got for a and b above – in other words, what is the relationship between duration and convexity?

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