A 13-year-maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 174.3 and modified duration of 12.06 years. A 30-year-maturity 7% coupon bond making annual coupon payments also selling at a yield to maturity of 9% has nearly identical duration-12.04 years-but considerably higher convexity of 271.1. Required: a. Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? b. Suppose the yield to maturity on both bonds decreases to 8%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? Complete this question by entering your answers in the tabs below. Required A Required B Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? Note: Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Actual Predicted Zero Coupon Bond Coupon Bond % % % %
A 13-year-maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 174.3 and modified duration of 12.06 years. A 30-year-maturity 7% coupon bond making annual coupon payments also selling at a yield to maturity of 9% has nearly identical duration-12.04 years-but considerably higher convexity of 271.1. Required: a. Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? b. Suppose the yield to maturity on both bonds decreases to 8%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? Complete this question by entering your answers in the tabs below. Required A Required B Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? Note: Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Actual Predicted 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 13-year-maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 174.3 and modified
duration of 12.06 years. A 30-year-maturity 7% coupon bond making annual coupon payments also selling at a yield to maturity of 9%
has nearly identical duration-12.04 years-but considerably higher convexity of 271.1.
Required:
a. Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What
percentage capital loss would be predicted by the duration-with-convexity rule?
b. Suppose the yield to maturity on both bonds decreases to 8%. What will be the actual percentage capital loss on each bond? What
percentage capital loss would be predicted by the duration-with-convexity rule?
Complete this question by entering your answers in the tabs below.
Required A Required B
Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond?
What percentage capital loss would be predicted by the duration-with-convexity rule?
Note: Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.
Actual
Predicted
Zero Coupon Bond Coupon Bond
%
%
%
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