A 10-year maturity zero-coupon bond selling at a yield to maturity of 7.25% (effective annual yield) has convexity of 157.5 and modified duration of 9.06 years. A 30-year maturity 7.5% coupon bond making annual coupon payments also selling at a yield to maturity of 7.25% has nearly identical modified duration9.04 yearsbut considerably higher convexity of 251.6. Suppose the yield to maturity on both bonds decreases to 6.25%.

1) What will be the actual percentage capital gain/loss on each bond?

2) What percentage capital gain/loss would be predicted by the duration-with- convexity rule?