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. Calculate the yield to call.

c. Assume market rates drop by one-half of one percent. Use modified duration to estimate the value of the bond following the decrease in interest rates.

d. Use your financial calculator (or present value formulas) to determine the new bond price if interest rates decrease.

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

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