A bond has a coupon of 5% and a face value of $1000 and will pay interest every six months for the next three years. At the end of the third year, you will receive a principal of $1000 in addition to the coupon.
a) What is the present value of the bond, assuming the market discount rate, r = .08?
b) What is the duration of this bond?
c) If the market rate were to change instantaneously to r=.06, what would duration predict the new price would be?