Explanation:
Use the two-term approximation:
From the previous questions:
So:
So the estimated price increase is approximately +$2.75, which is C.
Question 161.3. If the interest rate drops by 100 basis points, what is the estimated change in the bond’s price given by a two-term Taylor series expansion (i.e., duration and convexity)?
A
+`$2.51`
B
+`$2.71`
C
+`$2.75`
D
+`$2.88`
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