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. What is the duration of the bond?

a.) Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years).

b.) Find the actual price of the bond in part a assuming that its yield to maturity immediately increases from 7% to 10% (with maturity still 10 years).

c.) Given part b, what price would be predicted by the duration rule (Equation 16.3)? What is the percentage error of that rule? What do you conclude regarding the duration rule after comparing your response to that of part a? Do you think you can use the duration rule for large changes in the yields?