A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value, $100. (Yes, one hundred dollars). The convexity of the bond is 64.9330.

(i) Compute the Macaulay duration of the bond. Show all computations.

(ii) Calculate the actual price of the bond assuming that its yield to maturity immediately decreases 100 basis points from the current yield to maturity (with maturity still 10 years).

(iii) Suppose the yield to maturity of the bond falls by 100 basis point from the current yield to maturity. (1) What price would be predicted by the duration rule? What is the percentage error of that rule? Compute. (2) What price would be predicted by the duration-with-convexity rule? What is the percentage error of that rule? Compute.

(There is no exact yield and change in yield given)