3. (12 points) Consider a 5 year bond with annual coupon 6%.

a. What is the price of the bond should the required yield is 6% (compounding annually)?

Show the formula used. (3 points)

b. Estimate the price of the bond should the required yield be decreased by 1% to 5% using duration. (5 points)

c. Without doing the calculation, should the actual price of the bond with yield 5% be higher or lower than the answer computed in (b). Please draw the graph to illustrate your answer. (2 points) How will you explain the difference? (2 points)