Problem 11-26 (Algo)

A 30-year maturity bond making annual coupon payments with a coupon rate of 15.3% has duration of 10.59 years and convexity of 163.0. The bond currently sells at a yield to maturity of 9%. Required:

a. Find the price of the bond if its yield to maturity falls to 8%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

price of bond?

b. What price would be predicted by the duration rule, if its yield to maturity falls to 8%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

predicted price? c. What price would be predicted by the duration-with-convexity rule, if its yield to maturity falls to 8%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

predicted price? d-1. What is the percent error for each rule, if its yield to maturity falls to 8%? (Enter your answers as a positive value. Do not round intermediate calculations. Round "Duration Rule" to 2 decimal places and "Duration-with-Convexity Rule" to 3 decimal places.)

YTM : 8%

percent error for duration rule?

percent error for duration with convexity rule?

d-2. What do you conclude about the accuracy of the two rules?

multiple choice 1

• The duration rule provides more accurate approximations to the actual change in price.

• The duration-with-convexity rule provides more accurate approximations to the actual change in price.

e-1. Find the price of the bond if it's yield to maturity rises to 10%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Pice of bond?

e-2. What price would be predicted by the duration rule, if it's yield to maturity rises to 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

predicted price? e-3. What price would be predicted by the duration-with-convexity rule, if it's yield to maturity rises to 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

predicted price?

e-4. What is the percent error for each rule? (Do not round intermediate calculations. Round "Duration Rule" to 2 decimal places and "Duration-with-Convexity Rule" to 3 decimal places.)

YTM: 10%

percent error for duration rule?

percent error for duration with convexity rule?

e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) (d)?

multiple choice 2

• Yes

• No