Question
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
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 | % | % |
Predicted loss | % | % |
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 | % | % |
Predicted gain | % | % |
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