Question

Problem 11-24

A 30-year maturity bond making annual coupon payments with a coupon rate of 14% has duration of 10.53 years and convexity of 192.2. The bond currently sells at a yield to maturity of 9%.

Required:
(a)	Find the price of the bond if its yield to maturity falls to 8% or rises to 10%. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Yield to maturity of 8%	$
Yield to maturity of 10%	$

(b)	What prices for the bond at these new yields would be predicted by the duration rule and the duration-with-convexity rule?(Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	Duration rule	Duration-with- convexity rule
YTM falls to 8%	$	$
YTM increases to 10%	$	$

(c)	What is the percent error for each rule? (Round your answers to 3 decimal places. Omit the "%" sign in your response.)

	Duration rule	Duration-with- convexity rule
Percent error for 8% YTM	%	%
Percent error for 10% YTM	%	%

(d)	What do you conclude about the accuracy of the two rules?

Answer 1

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