Explanation:

The correct answer is B (5.05%).

1. Modified Duration Calculation: For a zero-coupon bond, the Macaulay duration equals its time to maturity (5 years). The modified duration is calculated as:

   $$\text{Modified Duration} = \frac{\text{Macaulay Duration}}{1 + \text{Yield}} = \frac{5}{1.02} = 4.901961$$

2. Percentage Price Change: The percentage change in price due to a yield change is given by:

   $$\text{Percentage Change} = -\text{Modified Duration} \times \Delta Y + \frac{1}{2} \times \text{Convexity} \times (\Delta Y)^2$$

   Substituting the values for a 1% decrease in yield ($\Delta Y = -0.01$):

   $$\text{Percentage Change} = -4.901961 \times (-0.01) + \frac{1}{2} \times 28.835 \times (0.01)^2 = 0.04901961 + 0.0014418 = 0.0504614 \approx 5.05\%$$

3. Why Not A or C?

   • A (4.76%) incorrectly subtracts the convexity adjustment instead of adding it.
   • C (5.14%) applies the convexity adjustment to the Macaulay duration instead of the modified duration.