MLK Bank has an asset portfolio that consists of $230 million of 15-year, 8 percent coupon, $1,000 bonds with annual coupon payments that sell at par.
a-1. What will be the bonds’ new prices if market yields change immediately by ± 0.10 percent?
a-2. What will be the new prices if market yields change immediately by ± 2.00 percent?
b-1. The duration of these bonds is 9.2442 years. What are the predicted bond prices in each of the four cases using the duration rule?
b-2. What is the amount of error between the duration prediction and the actual market values?
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