Question

A 30-year maturity bond making annual coupon payments with a coupon rate of 16.5% has duration of 11.19 years and convexity of 180.9. The bond currently sells at a yield to maturity of 8%.

a. Find the price of the bond if its yield to maturity falls to 7%. (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
7%	%	%

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 9%. (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
9%	%	%

e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) – (d)?

	Yes
	No

Answer 1