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Question
Formosan Independence Co. issues a 9-year semiannual payment bond with a par value of $1,000 a 10% coupon annual rate. The bond's credit rating is AA. Currently, this bond is a par bond in market.a. What is the duration of this par bond?
b. If Standard and Poors unexpectedly downgrades the U.S. government bond rating. The market interest rates increase. This bond's annual YTM increases by 2%. What is the impact on bond's interest rate risk? Please use duration to explain.
Answer
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