10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price will fall to $811.46, a decline of 18.85%. a. How does the price change according to the duration rule?

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10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the
coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its
initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price
will fall to $811.46, a decline of 18.85%.
a. How does the price change according to the duration rule?
b. How does the price change according to the duration-with-convexity rule?
Transcribed Image Text:10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price will fall to $811.46, a decline of 18.85%. a. How does the price change according to the duration rule? b. How does the price change according to the duration-with-convexity rule?
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