You just purchased a coupon bond with face value $1000, 6% coupons, and three years remaining to maturity. Assume that all market interest rates are 7 %.
(a) What is the duration of this bond?
(b) Compute the exact price change (using the present value formula) if interest rates drop to 6.75%.
(c) Use the duration to compute the approximate price change due to a drop in interest rates to 6.75%. How large is the approximation error (in dollars)?