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Practice for Chapter 7 and 8
Chapter 7
Practice 1
a)
Compute the duration of a 9% coupon 20year option free bond by changing the
yield down and up by 10 basis points.
b)
Suppose a 6% coupon 20year optionfree bond is selling at par value and
therefore offering a yield of 6%. Compute the duration by changing the yield up
and down by 10 basis points.
Practice 2
Using the duration for the 6% coupon 20year bond found in Part b of practice 1m answer
the following questions:
a)
What is the approximate percentage price change if the interest rates increase
by 10 basis points?
b)
Comment on the approximate compared to the actual price change given in
exhibit 6
c)
What is the approximate percentage price change if interest rates decrease by
10 basis points?
d)
Comment on the approximation compared to the actual price change as given
in exhibit 6
e)
What is the approximate percentage price change if interest rates increase by
200 basis points
f)
Comment on the approximation compared to the actual price change as given
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 Spring '10
 Liasa

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