Consider a bond that promises the following cash flows. The yield to maturity is 10%.

You plan to buy this bond, hold it for 3.5 years, and then sell the bond.

(a) What total cash will you receive from the bond after the 3.5 years? Assume that periodic cash flows are reinvested at 10%.

(b) If immediately after you buy this bond all market interest rates drop to 9% (including your reinvestment rate), what will be the impact on your total cash flow after 3.5 years? How does this compare to part (a)? (c) Assuming all market interest rates are 10%, what is the duration of this bond?

Year 0 1 2 3 4 Promised Payments 160 170 180 230