You purchased a bond with the following characteristics:

$1,000 par value 6.5% coupon, annual payments

25 years to maturity Callable in 7 years at $1,065.

You paid $1063.92 for the bond. Macaulay duration is 13.34 years

a. Calculate the yield to maturity.

b. Assume market rates drop by one-half of one percent, what will be the new bond price?

c. Using modified duration, estimate the value of the bond following the drop in interest rates.

d. The estimate (from part b), is fairly close to the actual (in part a). What explains the difference in the two values? Be specific.

e. Calculate the yield to call.

f. Of the three duration measures (Macaulay, modified, effective) which is the most appropriate measure for this bond? Why?