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A newly issued bond has the following characteristics:
Par value = $1000 Coupon rate = 8% Yield to Maturity = 8% Time to maturity = 15 years Duration = 10 years
1. Calculate modified duration using the information above.
2. If the yield to maturity increases to 8.5%, what will be the change (in dollar amount) in bond price?
3. Identify the direction of change in modified duration if: i. the coupon of the bond is 4%, not 8%. ii. the maturity of the bond is 7 years, not 15 years.
4. How can you construct a portfolio with a duration of 8 years using this bond and a 5 year zero coupon bond?
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