Find the duration of a 8% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 7%.

Find the bond price.

If the market interest rates decrease by .5% per year (i.e. YTM becomes 6.5%). Use duration formula to find how such interest rate change will affect the bond price?

Find the new bond price using a financial calculator.

Compare actual and duration predicted bond price changes.

Which change is larger? What role does bond price convexity play here?

If the market interest rates decrease by .5% per year (i.e. YTM becomes 6.5%).

Use the duration formula to find how such interest rate change will affect the bond price?

Find the new bond price?

Compare actual and duration predicted bond price changes. Which change is larger? What role does bond price convexity play here?