Consider a bond with the following terms: 10-years to maturity $1,000 face value Coupon are paid 2 times per year Annual coupon rate is 5%

Assume that the bond will make its next coupon payment in exactly 1/2 year.

1. Suppose now that the discount rate increased to 10% ( i ) Find the exact price of the bond under the new discount rate. ( ii ) Approximate the new bond price using modified duration ( iii ) How well did modified duration approximate the bond price? (iv) Explain your answer to ( iii ), how far off were you why?