A $1000 par value bond has a coupon rate 6.5%. The bond has ten years until it matures and pays interest annually. The bond is currently priced to yield 7.5%.

1. calculate the value of this bond.

2. Calculate the duration of this bond.

3. Using a financial calculator---what will be the value of the bond is intrest rates fall to 7 percent? Still 10 years to maturity.

4. Use modified duration to estimate the bond value if interest rates fall to 7%.

5. What accounts for the difference in these two values?