FIN $302/$ Dr$.$ Fernandez

$3.$ Estimate the PRICE of a $3-$year, $10\%$ coupon discount bond. The discount rate is $20\%.$

$\backslash$table$[[,,,,],[$Year$,$Coupon,PV$,\backslash$table$[[\%$ PV of Total$],[$Value$]],\backslash$table$[[$Weighted$],[$Maturity$]]],[1,,,,],[2,,,,],[3,,,,],[3,,,,],[,$Price $=,,$Duration $=,]]$

a$.$ Estimate the DURATION of this bond

b$.$ Interpret your results. What does duration tell you?

i$.$ Based on your estimated duration, what is the effect on the bond's price if interest rates decrease by $1\%?$ Explain.

$\%P$~~$-$DUR$(\frac{{}_i}{1+i})$

ii$.$ If the Duration is four years, how does that affect the bond price? $($Re$-$esti the change in price with a $4-$year duration in the formula above$).$

Why are your results different?