Question

A 30-year maturity bond making annual coupon payments with a coupon rate of 14.0% has duration of 10.04 years and convexity of 147.1. The bond currently sells at a yield to maturity of 10%. a. Find the price of the bond if its yield to maturity falls to 9%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price of the bond $ b. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Predicted price $ c. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Predicted price $ d-1. What is the percent error for each rule? (Enter your answer as a positive value. Do not round intermediate calculations. Round "Duration Rule" to 2 decimal places and "Duration-with-Convexity Rule" to 3 decimal places.) Percent Error YTM Duration Rule Duration-with- Convexity Rule 9% % % d-2. What do you conclude about the accuracy of the two rules? The duration rule provides more accurate approximations to the actual change in price. The duration-with-convexity rule provides more accurate approximations to the actual change in price. e-1. Find the price of the bond if it's yield to maturity rises to 11%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price of the bond $ e-2. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Predicted price $ e-3. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Predicted price $ e-4. What is the percent error for each rule? (Do not round intermediate calculations. Round "Duration Rule" to 2 decimal places and "Duration-with-Convexity Rule" to 3 decimal places.) Percent Error YTM Duration Rule Duration-with- Convexity Rule 11% % % e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) – (d)? Yes No

Answer 1