A bond has a face value of 100 with a 6% coupon rate. The maturity is 4 years. The coupon payment is made at the end of each period. The interest rate is currently 5%.

a. Calculate the current price of the bond.

b. Suppose you buy the bond now and sell the bond in one year at the price of 105, what is your rate of return.

c. Calculate the Macaulay Duration of the bond.

d. Based on your answer in question c, what would the price of bond be if the interest increases by 2% (hint: Percent change in market value of security , where D is Macaulay Duration)? Do you think Macaulays Duration analysis underestimate or overestimate the interest rate risk and why?