An 11-year maturity zero-coupon bond selling at a yield to maturity of 5.75% (effective annual yleld) has convexity of 171.9 and modified duration of 10.06 years. A 30-year maturity 9.5% coupon bond making annual coupon payments also selling at a yield to maturity of 5.75% has nearly identical duration-10.04 years-but considerably higher convexity of 264.3. a. Suppose the yield to maturity on both bonds Increases to 6.75%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (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 % %

An 11-year maturity zero-coupon bond selling at a yield to maturity of 5.75% (effective annual yleld) has convexity of 171.9 and modified duration of 10.06 years. A 30-year maturity 9.5% coupon bond making annual coupon payments also selling at a yield to maturity of 5.75% has nearly identical duration-10.04 years-but considerably higher convexity of 264.3. a. Suppose the yield to maturity on both bonds Increases to 6.75%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (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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A 9-year-maturity zero-coupon bond selling at a yield to maturity of 7.75% (effective annual yield) has convexity of 169.5 and modified duration of 8.06 years. A 30-year-maturity 7.5% coupon bond making annual coupon payments also selling at a yield to maturity of 7.75% has nearly identical duration-8.04 years-but considerably higher convexity of 257.5. Required: a. Suppose the yield to maturity on both bonds increases to 8.75%. 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 6.75%. 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 8.75%. What will be the actual percentage capital loss on…
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?…
A 13.55-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 169.0 and modified duration of 12.55 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration—12.30 years—but considerably higher convexity of 272.9. Required: a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? 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.) 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.)
A 13.35-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 164.2 and modified duration of 12.36 years. A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-12.30 years-but considerably higher convexity of 272.9. Required: a. Suppose the yield to maturity on both bonds increases to 9%. i. What will be the actual percentage capital loss on each bond? il. 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.) Zero-Coupon Bond Coupon Bond LActual loss Predicted loss b. Suppose the yield to maturity on both bonds decreases to 7%. Show Transcribed Text b. Suppose the yield to maturity on both bonds decreases to 7%. i. What will be the actual percentage capital gain on each bond? ii. What percentage capital gain would be predicted by…
A 12-year maturity zero-coupon bond selling at a yield to maturity of 5.25% (effective annual yield) has convexity of 159.9 and modified duration of 11.06 years. A 30-year maturity 9.5% coupon bond making annual coupon payments also selling at a yield to maturity of 5.25% has nearly identical duration-11.04 years-but considerably higher convexity of 258.4. a. Suppose the yield to maturity on both bonds increases to 6.25 %. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (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 % % % b. Suppose the yield to maturity on both bonds decreases to 4.25%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Input all amounts as positive values.…
A 9-year maturity zero-coupon bond selling at a yield to maturity of 7.75% (effective annual yield) has convexity of 169.5 and modified duration of 8.06 years. A 30-year maturity 7.5% coupon bond making annual coupon payments also selling at a yield to maturity of 7.75% has nearly identical duration-8.04 years-but considerably higher convexity of 257.5. a. Suppose the yield to maturity on both bonds increases to 8.75% What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) Zero Coupon Bond Coupon Bond Actual Predicted
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 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?b. Repeat part (a), but this time assume the yield to maturity decreases to 7%.c. Compare the performance of the two bonds in the two scenarios, one involving an increase in rates, the other a decrease. Based on the comparative investment performance, explain the attraction of convexity.d. In view of your answer to part (c), do you think it would be possible for two bonds with equal duration but different convexity to be…
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 duration—11.79 years—but considerably higher convexity of 231.2. a. Suppose the yield to maturity on both bonds increases to 9%. 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. Repeat part ( a ), but this time assume the yield to maturity decreases to 7%. c. Compare the performance of the two bonds in the two scenarios, one involving an increase in rates, the other a decrease. Based on the comparative investment performance, explain the attraction of convexity. d. In view of your answer to ( c ), do you think it would be possible for two bonds with equal duration but different convexity to be priced…
Suppose the current, zero-coupon, yield curve for risk-free bonds is as follows: Maturity (years) Yield to Maturity 1 4.33% 2 4.64% 3 4.92% 4 5.09% 5 5.30% a. What is the price per $100 face value of a 3-year, zero-coupon risk-free bond? b. What the price per $100 face value of a 4-year, zero-coupon, risk-free bond? c. What is the risk-free interest rate for a 1-year maturity? Note: Assume annual compounding. a. What is the price per $100 face value of a 3-year, zero-coupon risk-free bond? The price is $ (Round to the nearest cent.) b. What is the price per $100 face value of a 4-year, zero-coupon, risk-free bond? The price is $ (Round to the nearest cent.) c. What is the risk-free interest rate for a 1-year maturity? The risk-free rate is %. (Round to two decimal places.)
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A 10-year maturity bond making annual coupon payments with a coupon rate of 5% andcurrently selling at a yield to maturity of 4% has a convexity of 145.4. a. Compute the Modified Duration of the bond.b. Based on the information above, compute the approximated new price using the Duration& Convexity adjustment if the yield to maturity increases by 75 basis points.c. What is the percentage error?
a. Manually compute the modified duration for a 3-years to maturity, 5% annual coupon bond, when the yield-to-maturity is 7%. b. Manually compute the modified duration for a 3-years to maturity, 5% annual coupon bond, when the yield-to-maturity is 5%. c. Compare your answers to above questions. Are they different? If so, what is the reason? Explain clearly

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