A zero coupon bond with 2.5 years to maturity has a annualized yield to maturity of 5%. A 3-year maturity annual-pay coupon bond has as face value of $1000 and a 5% coupon rate. The coupon bond also has a yield to maturity of 5%.

Please calculate the duration of each bond. Which bond has the higher duration and why?

Using the formula that approximates bond price change as a function of the duration, please calculate the price change of both bonds if yields drop from 5% to 4%.