Assume that you are planning to invest in a five-year coupon paying bond (coupons are paid semi-annually) with face value of $1000. Coupon per annum is 6% and applicable market yield for this bond is 7% per annum.

1. Calculate the duration and the modified duration of the above bond.

2. Considering the current interest rate environment, you anticipate a rate increase soon and this will increase the current market yield from 7% to 7.75%. You are required to calculate the expected price change associated with this upward movement in market yield.

3.Evaluate the direction of price change.