Exercise $3$

A $4-$year bond with a yield of $9\%($continuously compounded$)$ pays an $5\mathrm{.}5\%$ coupon at the end of each year.

What is the bond$$s price?

What is the bond$$s duration?

Use the duration to calculate the effect on the bond$$s price of a $0\mathrm{.}2\%$ increase in its yield.

Recalculate the bond$$s price on the basis of a $9\mathrm{.}2\%$ per annum yield and verify that the result is in agreement with your answer to $($c$).$

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