Question
In: Finance
A 14.55-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield)...
A 14.55-year maturity zero-coupon bond selling at a yield to
maturity of 7% (effective annual yield) has convexity of 197.7 and
modified duration of 13.60 years. A 40-year maturity 5% coupon bond
making annual coupon payments also selling at a yield to maturity
of 7% has nearly identical modified duration—-13.96 years—but
considerably higher convexity of 338.8.
a. Suppose the yield to maturity on both bonds increases to 8%.
- What will be the actual percentage capital loss on each bond?
- What percentage capital loss would be predicted by the duration-with-convexity rule?
(Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Suppose the yield to maturity on both bonds
decreases to 6%. What will be the actual percentage capital gain on
each bond? What percentage capital gain would be predicted by the
duration-with-convexity rule? (Do not round intermediate
calculations. Round your answers to 2 decimal
places.)
Solutions
jeff jeffy answered 1 year agoRelated Solutions
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