A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has duration of 11.54 years and convexity of 192.4. The bond currently sells at a yield to maturity of 8%.

a) Find the price of the bond if its yield to maturity falls to 7%.

b) What price would be predicted by the duration rule?

c) What price would be predicted by the duration-with-convexity rule?

d) What is the percent error for each rule? What do you conclude about the accuracy of the two rules? [Hint: Percent error of prediction = (predicted price/actual price)-1.]