Bond Duration and Interest Rate Risk 1. Calculate the duration of a $1,0006% coupon bond with three years to maturity. Assume that all market interest rates are 7%. 2. Consider the bond in the previous question. Use the duration from the previous question calculate the expected price change if interest rates drop to 6.75% using the duration approximation. 3. Use bond pricing formula to find the price of the bond in question 1 when market interest rate is 7% and 6.75% respectively. Use the bond prices to calculate the percentage change (increase or decrease) in the bond price when market interest rate drop from 7% to 6.75% ? (It should be very close to your answers in Question 2. That is why we usually use duration to estimate the interest rate risk. ) 4. Calculate the duration of a 10-year zero coupon bond with face value of $1,000. 5. The duration of a $100 million portfolio is 10 years. $40 million dollars in new securities with duration of 18.75 years are added to the portfolio. What is the duration of the new portfolio? 6. Assume you just deposited $1,000 into a bank account. The current real rate is 2% and inflation is expected to be 6% over the next year. What nominal rate would you required from the bank over the next year? How much money would you have at the end of one year? If you are saving to buy a stereo that currently sells for $1,060, will you have enough to buy it