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Security B: a two-year default-free bond with a face value of $1000, a coupon rate of 4% and a yield to maturity of 4%. (a)

Security B: a two-year default-free bond with a face value of $1000, a coupon rate of 4% and a yield to maturity of 4%.

(a) Determine the present value and the Modified duration of Security B.

(b) Consider the following statement: The duration approximation will understate the fall in Security Bs price if its yield rises. Explain whether this statement is correct or incorrect.

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