You hold a bond with three years to maturity and a yield to maturity of 10% If the yield to maturity of the bond decreases to 8% the duration rule predicts that the price of the bond will increase by 4.93736%. Which is the following can be true? 1. The annual price increase is 4.8681% 2. The actual price increase is 5.0235% 3. The bond is selling at par 4. The bond is a zero-coupon bond 5. None of these is possible. Please explains and show the calculation, if appropriate.

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.