A mutual fund owns a $13,000,000 9-year bond with an annual coupon rate of 5.75%. The bond has a 7.3121 duration, a yield to maturity of 5.15% and a market value of $13,550,725.47.

a. Based on the duration model, estimate the effect on the market value of the bond if market interest rates increase 75 basis points. (5 points)

b. Why would the mutual fund be concerned about the change in value of the bond? Be sure to indicate which risk this situation involves in your response