A 10-year maturity zero-coupon bond selling at a yield to maturity of 8 percent has convexity of 47 and modified duration of 9. A 30-year maturity 6 percent coupon bond making annual coupon payments also selling at a yield to maturity of 8 percent has identical duration but convexity of 100. Both bonds have the same credit rating and the par value for each bond is $100.00.

Use this information to answer the following questions:

1. Suppose the yield to maturity on both bonds increases to 9 percent. What percentage capital gain or loss would be predicted by the duration-with-convexity rule? Break this percentage change into the change due to duration and the change due to convexity.
2. Repeat part (a,) but this time assume that the yield to maturity decreases to 7 percent.
3. Which bond has a lower duration than expected? Justify your answer with supporting evidence. What feature of the bond could potentially have caused this?