The Provincial Insurance Company has the choice of investing $100,000 in either a mortgage bond with annual payments based on a 10-year amortization schedule with a maturity of five years at 10 percent or a 5-year corporate bond with annual interest payments and a final principal payment also yielding 10 percent.
a. Find the duration of each instrument if they are issued at par.
b. If the market rate of interest on each bond fell from 10 percent to 7 percent and the durations found in part (a) remained constant, what would be the new price for each bond?