Question
A 30-year maturity bond making annual coupon payments with a coupon rate of 10.2% has duration of 11.03 years and convexity of 176.83. The bond
A 30-year maturity bond making annual coupon payments with a coupon rate of 10.2% has duration of 11.03 years and convexity of 176.83. The bond currently sells at a yield to maturity of 9%.
a. Find the price of the bond if its yield to maturity falls to 8%.
b. What price would be predicted by the duration rule?
c. What price would be predicted by the duration-with-convexity rule?
d-1. What is the percent error for each rule?
d-2. What do you conclude about the accuracy of the two rules?
e-1. Find the price of the bond if its yield to maturity increases to 10%.
e-2. What price would be predicted by the duration rule?
e-3. What price would be predicted by the duration-with-convexity rule?
e-4. What is the percent error for each rule?
e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) (d)?
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