Answer: 7.6

The effective duration of a bond measures its price sensitivity to changes in the benchmark yield curve. The correct calculation is: \[ \text{EffDur} = \frac{(PV_+) - (PV_-)}{2 \times (\Delta \text{Curve}) \times (PV_0)} \] Where: - \( PV_0 = 95.35 \) (current price) - \( PV_+ = 99.50 \) (price if yield decreases by 0.5%) - \( PV_- = 92.25 \) (price if yield increases by 0.5%) - \( \Delta \text{Curve} = 0.005 \) (change in yield) Substituting the values: \[ \text{EffDur} = \frac{99.50 - 92.25}{2 \times 0.005 \times 95.35} = 7.60 \] **Why?** Effective duration and convexity are the most appropriate measures for bonds with embedded options, as they account for potential changes in cash flows due to interest rate movements.

Author: LeetQuiz Editorial Team