Question

A 30-year maturity bond making annual coupon payments with a coupon rate of 7.2% has duration of 13.21 years and convexity of 247.25. 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%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) c. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d-1. What is the percent error for each rule? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) d-2. What do you conclude about the accuracy of the two rules? The duration-with-convexity rule provides more accurate approximations to the true change in price. The duration rule provides more accurate approximations to the true change in price. e-1. Find the price of the bond if its yield to maturity increases to 8%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) e-2. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) e-3. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) e-4. What is the percent error for each rule? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) – (d)? Yes No

ONLY NEED E1-E5

Answer 1

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