Mr. Spice asks Mr. Myers to quantify the value changes from changes in interest rates. To illustrate, Mr. Myers computes the value change for the fixed-rate note. He assumes an increase in interest rates of 100 basis points. Which of the following is the best estimate of the change in value for the fixed-rate note?
a. ˆ’$7.17
b. ˆ’$3.59
c. $3.59

Frank Myers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed income portfolios. Mr. Spice has approached Mr. Myers with several questions.
Mr. Myers has decided to illustrate fixed-income trading strategies using a fixed-rate bond and note. Both bonds have semiannual coupons. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the table below.

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Fixed-Rate Note Fixed-Rate Bond 107.18 Price 100.00 Yield to maturity 5.00% 5.00% Periods to maturity 18 8. 3.5851 Modified duration 6.9848