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An investor finds that for every 1% increase in interest rates, a bond’s price decreases by 4.21% compared to a 4.45% increase in value for every 1% decline in interest rates. If the bond is currently trading at par value, the bond’s duration is closest to:

A) 8.66.

B) 43.30.

C) 4.33.

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Duration is a measure of a bond’s sensitivity to changes in interest rates.

Duration = (V_- – V₊) / [2V₀(change in required yield)] where:

V_- = estimated price if yield decreases by a given amount
V₊ = estimated price if yield increases by a given amount
V₀ = initial observed bond price

Thus, duration = (104.45 – 95.79)/(2 × 100 × 0.01) = 4.33. Remember that the change in interest rates must be in decimal form.

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An international bond investor has gathered the following information on a 10-year, annual-pay U.S. corporate bond:

• Currently trading at par value
• Annual coupon of 10%
• Estimated price if rates increase 50 basis points is 96.99%
• Estimated price is rates decrease 50 basis points is 103.14%

The bond’s duration is closest to:

A) 3.14.

B) 6.58.

C) 6.15.

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Duration is a measure of a bond’s sensitivity to changes in interest rates.

Duration = (V_- – V₊) / [2V₀(change in required yield)] where:

V_- = estimated price if yield decreases by a given amount
V₊ = estimated price if yield increases by a given amount
V₀ = initial observed bond price

Thus, duration = (103.14 ? 96.99) / (2 × 100 × 0.005) = 6.15. Remember that the change in interest rates must be in decimal form.