Answer: 7.3.

## Explanation Effective duration measures the sensitivity of a bond's price to changes in interest rates. The formula for effective duration is: \[ \text{Effective Duration} = \frac{V_- - V_+}{2 \times V_0 \times \Delta y} \] Where: - \( V_- \) = Price when yield decreases (132.41) - \( V_+ \) = Price when yield increases (127.66) - \( V_0 \) = Current price (130.00) - \( \Delta y \) = Change in yield (0.0025 or 25 basis points) Plugging in the values: \[ \text{Effective Duration} = \frac{132.41 - 127.66}{2 \times 130.00 \times 0.0025} \] \[ = \frac{4.75}{2 \times 130.00 \times 0.0025} \] \[ = \frac{4.75}{0.65} \] \[ = 7.3077 \] Rounding to one decimal place gives 7.3, which matches option A. **Key points:** - Effective duration is calculated using the bond's price at different yield levels - The denominator uses the current price multiplied by twice the yield change - This calculation assumes a parallel shift in the yield curve - The result of 7.3 indicates the bond's price will change by approximately 7.3% for a 100 basis point change in yield

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