Essay
A Pfizer bond has a YTM of 7%, it is selling for $980, and its Macaulay duration is 5 years. Assume the required yield increases to 7.4%. What is the new price predicted by modified duration? Is the actual estimated price higher or lower than that predicted by modified duration?
Correct Answer:
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D* = 10 / 1.035 = 9.66184 / 2 = 4.83092
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