Assume a 7-year zero coupon bond with $1000 face value with a yield of 7% (continuously compounding). Wherever applicable, use e = 2.71828.

What is the price of the bond?

Use the duration to calculate the effect on the bonds price of a 0.5% decrease on its yield.

Recalculate the bonds price on the basis of a 6.5% per annum yield and verify that your result in (b) is a good approximation of the change in the bonds price using the duration.