Suppose you purchase a six-year, 8 percent coupon bond (paid annually) that is priced to yield 9 percent. The face value of the bond is $1,000. (3 points)

1. Show that the duration of this bond is equal to five years.

D=[(80/1.08)+(80*2/(1.08)^2)+(80*3/(1.08)^3)+(80*4/(1.08)^4)+(80*5/(1.08)^5)+(1080*6/(1.08)^6)]/1000= 4992.7093/1000= 4.9927093= 5years

b. Show that if interest rates rise to 10 percent within the next year and your investment horizon is five years from today, you will still earn a 9 percent yield on your investment. (Show all the work!)

c. Show that a 9 percent yield also will be earned if interest rates fall next year to 8 percent. (Show all the work!)