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Suppose we have a fixed set of future cashflows with a present value of P 0 . The current effective annual yield rate is 6
Suppose we have a fixed set of future cashflows with a present value of The current effective annual yield rate is For these cashflows and yield rate, you are given the following:
The duration is
The modified duration based on the effective annual rate is
Now suppose the yield rate increases by
Estimating the new present value of the cashflows using duration gives
Estimating the new present value of the cashflows using modified duration gives
Find the original present value
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