A 12.58-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 146.5 and modified duration of 11.65 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-11.79 years-but considerably higher convexity of 231.2.

a.Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule?(Do not round intermediate calculations.Round your answers to 2 decimal places.)

Zero-Coupon Bond Coupon Bond

Actual loss % %

Predicted loss % %

b.Suppose the yield to maturity on both bonds decreases to 7%. What will be the actual percentage capital gain on each bond? What percentage capital gain would be predicted by the duration-with-convexity rule?(Do not round intermediate calculations.Round your answers to 2 decimal places.)

Zero-Coupon Bond Coupon Bond

Actual gain % %

Predicted gain % %