Question: Consider a 3-year 10% coupon bond with a face value of $100. Suppose that the yield on the bond is 12% p.a. with continuous compounding.

Consider a 3-year 10% coupon bond with a face value of

Consider a 3-year 10% coupon bond with a face value of $100. Suppose that the yield on the bond is 12% p.a. with continuous compounding. Coupon payments of $5 are made every 6 months. (a) Determine the duration of the bond. (b) Suppose the yield on the bond increases by 10 basis points (= 0.1%). Use the duration relationship to predict how the bond price will change. How accurate is this approxima- tion

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