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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

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?

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

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

- What price would be predicted by the duration rule?

- What is the percentage error of that rule?

- What do you conclude regarding the duration rule after comparing your response to that of the first question?

- Do you think you can use the duration rule for large changes in the yields?

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