(Answered) You just purchased a coupon bond with face value 1000 6

Management Studies

You just purchased a coupon bond with face value $1000, 6% coupons, and three years remaining to maturity. Assume that all market interest rates are 7%.

(a) What is the duration of this bond?

(b) Compute the exact price change (using the present value formula) if interest rates drop to 6.75%.

(c) Use the duration to compute the approximate price change due to a drop in interest rates to 6.75%. How large is the approximation error (in dollars)?

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