An annual coupon bond has a coupon rate of 10% and matures in two years. The current bond yield is 8%, the face value for the bond is $1000.

Answer the following questions (5 marks):

1. Calculate the Macaulay duration of the bond (2 marks)
2. Using the duration approach, calculate the percentage of change in bond price when the bond yield increases by 2% (2 marks).
3. Discuss the limitations of the duration approach in modelling the interest rate sensitivity of a bond (1 mark).