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Answer: 6.34
## Explanation Using the effective duration formula: $$\text{Effective Duration} = \frac{P_{-} - P_{+}}{2 \times P_{0} \times \Delta y}$$ Where: - $P_{-}$ = 96.35 (price when rates fall) - $P_{+}$ = 92.75 (price when rates rise) - $P_{0}$ = 94.65 (current price) - $\Delta y$ = 0.0030 (30 basis points = 0.30%) $$\text{Effective Duration} = \frac{96.35 - 92.75}{2 \times 94.65 \times 0.0030} = \frac{3.60}{0.5679} = 6.34$$ Therefore, the effective duration is **6.34**, which corresponds to option B.
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An 8-year 5% coupon bond with at par value of 100 is currently trading at a price of 94.65. The price of this bond rises to 96.35 when interest rates fall by 30 basis points and falls to 92.75 when interest rates rise by 30 basis points. The effective duration of this bond is closest to:
A
5.99
B
6.34
C
6.69
D
7.04
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