A 14.65-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 160.6 and modified duration of 13.41 years. A 40-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical modified duration?-13.38 years?-but considerably higher convexity of 280.0.

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A 14.65-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 160.6 and modified duration of 13.41 years. A 40-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical modified duration --13.38 years-but considerably higher convexity of 280.0. a. Suppose the yield to maturity on both bonds increases to 8%. 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 -12.74 % -12.42 X Predicted loss -12.69% % -12.27% X % b. Suppose the yield to maturity on both bonds decreases to 6%. 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 14.75% 0 % 15.84% Predicted gain 14.69% X % 15.65% X %