A 30-year-maturity bond making annual coupon payments with a coupon rate of 7% has duration of 15.16 years and convexity of 315.56. The bond currently sells at a yield to maturity of 5%.

Required:

a. Find the price of the bond if its yield to maturity falls to 4%.

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 6%.

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)?