You have purchased a bond for $973.02. The bond has a coupon rate of 6.4%, pays interest annually, has a face value of $1,000, 4 years to maturity, and a yield to maturity of 7.2%. The bond's duration is 3.6481 years. You expect that interest rates will fall by .3% later today.
Use the modified duration to find the approximate percentage change in the bond's price. Find the new price of the bond from this calculation.
Use your calculator to do the regular present value calculations to find the bond's new price at its new yield to maturity.
What is the amount of the difference between the two answers? Why are your answers different? Explain the reason in words and illustrate it graphically.