In: Finance
A 30-year maturity bond making annual coupon payments with a
coupon rate of 11% has duration of 12.44 years and convexity of
221.07. The bond currently sells at a yield to maturity of
7%.
a. Find the price of the bond if its yield to
maturity falls to 6%.
b. What price would be predicted by the
duration rule?
c. What price would be predicted by the
duration-with-convexity rule?
d-1. What is the percent error for each
rule?
d-2. What do you conclude about the accuracy of
the two rules?
e-1. Find the price of the bond if its yield to
maturity increases to 8%.
e-2. What price would be predicted by the
duration rule?
e-3. What price would be predicted by the
duration-with-convexity rule?
e-4. What is the percent error for each
rule?
e-5. Are your conclusions about the accuracy of
the two rules consistent with parts (a) – (d)?