Assume a 7 year maturity, 5% coupon bond with a yield to maturity of 3.5%:
a. Calculate the bond’s effective duration using a 50 basis point shock to the yield.
b. Assuming a 0.75% decline in yield, calculate the estimated % change in price for the bond using your answer in part A.
c. Explain why the estimated change in price using only duration is not accurate.