A 5-year, 8.5% annual-compounding bond priced to yield 10%.

a. Calculate the Macaulay duration of the bond.

b. Calculate the bond price.

c. Calculate the modified duration of the bond.

d. According the modified duration, what is the estimated bond price if the market yields decline to 9%?

e. Using financial calculator, calculate the actual bond price if rate do drop to 9%? (2 marks)

f. How does this price change compare to that predicted by the modified duration? Explain the difference.

g. Find the effective duration using 200 basis points change in interest rate.