Answer: 7.45

**Explanation:** The effective duration of a bond measures its sensitivity to changes in interest rates. The formula for effective duration is: \[ \text{Effective Duration} = \frac{(PV_{-} - PV_{+})}{2 \times \Delta \text{curve} \times PV_0} \] Where: - \( PV_{-} \) is the price if interest rates decrease (100.75). - \( PV_{+} \) is the price if interest rates increase (99.26). - \( PV_0 \) is the current price (100.00). - \( \Delta \text{curve} \) is the change in the benchmark rate (0.001 or 10 basis points). Plugging in the values: \[ \text{Effective Duration} = \frac{(100.75 - 99.26)}{2 \times 0.001 \times 100.00} = 7.45 \] **Why Option B is Correct:** - It correctly uses the price if interest rates decrease (\( PV_{-} \)) and the price if interest rates increase (\( PV_{+} \)) in the numerator. - It includes the factor of 2 in the denominator. **Why Other Options Are Incorrect:** - **Option A (3.75):** Incorrectly uses the current price (\( PV_0 \)) instead of \( PV_{+} \) in the numerator. - **Option C (7.50):** Fails to multiply by 2 in the denominator, leading to an overestimation of the effective duration. **Additional Insight:** Effective duration and effective convexity are the most appropriate measures of interest rate risk for bonds with embedded options, as they account for potential changes in cash flows due to interest rate movements.

Author: LeetQuiz Editorial Team