The following information was reported in William M. Boyce, Webster Hughes, Peter S. A. Niculescu, and Michael Waldman, "The Implied Volatility of Fixed- Income Markets," in Frank J. Fabozzi (ed.), Advances and Innovations in the Bond and Mortgage Markets (Chicago: Probus Publishing, 1989) for two issues of Common Wealth Edison bonds as of December 31, 1987: Effective Duration" Next Call Market Issue Call Date Price Price (years) 14.375 of 1994 7/15/89 $104.11 $111.30 1.7 10.625 of 1995 9/1/90 102.86 104.12 3.4 "Evaluated at 16% volatility.

a. What is effective duration?

b. Why is it necessary to make an interest-rate volatility assumption to calculate effective duration?

AppendixLO1