Question

A 28-year maturity bond making annual coupon payments with a coupon rate of 10% has duration of 12.14 years and convexity of 190.6. The bond currently sells at a yield to maturity of 7%.

Required:
(a)	Find the price of the bond if its yield to maturity falls to 6% or rises to 8%. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Yield to maturity of 6%	$
Yield to maturity of 8%	$

(b)	What prices for the bond at these new yields would be predicted by the duration rule and the duration-with-convexity rule?(Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	Duration rule	Duration-with- convexity rule
YTM falls to 6%	$	$
YTM increases to 8%	$	$

(c)	What is the percent error for each rule? (Round your answers to 3 decimal places. Omit the "%" sign in your response.)

	Duration rule	Duration-with- convexity rule
Percent error for 6% YTM	%	%
Percent error for 8% YTM	%	%

(d)	What do you conclude about the accuracy of the two rules?

       (Click to select)   The duration-with-convexity rule provides more accurate approximations to the actual change in price.   The duration rule provides more accurate approximations to the actual change in price.

Answer 1