A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-11.79 years--but considerably higher convexity of 231.2. a. Suppose the yield to maturity on both bonds increases to 9%. i. What will be the actual percentage capital loss on each bond? ii. What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Actual loss Predicted loss Zero-Coupon Bond % % Coupon Bond % %
A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-11.79 years--but considerably higher convexity of 231.2. a. Suppose the yield to maturity on both bonds increases to 9%. i. What will be the actual percentage capital loss on each bond? ii. What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Actual loss Predicted loss Zero-Coupon Bond % % Coupon Bond % %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified
duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8%
has nearly identical modified duration-11.79 years--but considerably higher convexity of 231.2.
a. Suppose the yield to maturity on both bonds increases to 9%.
i. What will be the actual percentage capital loss on each bond?
ii. What percentage capital loss would be predicted by the duration-with-convexity rule?
(Do not round intermediate calculations. Round your answers to 2 decimal places.)
Actual loss
Predicted loss
Zero-Coupon Bond
%
%
Coupon Bond
%
%
Transcribed Image Text:b. Suppose the yield to maturity on both bonds decreases to 7%. What will be the actual percentage capital gain on each bond? What
percentage capital gain would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your
answers to 2 decimal places.)
Actual gain
Predicted gain
Zero-Coupon Bond
%
Coupon Bond
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