Krishna buys an n-year 1000 bond at par. The Macaulay duration is 7.959 years using an annual effective interest rate of 7.2%.

Calculate the estimated price of the bond, using the first-order Macaulay approximation, if the interest rate rises to 8.0%.

• 940.60
• 942.54
• 944.56
• 947.03
• 948.47

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: B

[[math]] P(0.08)\approx1000\bigg(\frac{1.072}{1.08}\bigg)^{7.959}=942.54. [[/math]]

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.