A 13.05-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 157.2 and modified duration of 12.08 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration12.30 yearsbut considerably higher convexity of 272.9.

Required:

a. Suppose the yield to maturity on both bonds increases to 9%.

1. What will be the actual percentage capital loss on each bond?
2. 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.)

b. Suppose the yield to maturity on both bonds decreases to 7%.

1. What will be the actual percentage capital gain on each bond?
2. 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.)