A bank quotes you an interest rate of 7% per annum with quarterly compounding. What is the equivalent rate with (a) continuous compounding and (b) annual compounding?

A five-year bond with a yield of 7% (continuously compounded) pays an 8% coupon at the end of each year.

a) What is the bond's price?

b) Whatisthebond'sduration?

c) Use the duration to calculate the effect on the bond's price of a 0.2% decrease in its

yield.

d) Recalculate the bond's price on the basis of a 6.8% per annum yield and verify that the

result is in agreement with your answer to (c).