Question
A 13.55-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 160.8 and modified duration of 12.05
A 13.55-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 160.8 and modified duration of 12.05 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 duration-12.05 years-but considerably higher convexity of 290.0. |
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 | % | % |
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