An 8-year maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 155.1 and modified duration of 7.06 years. A 30-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 9% has nearly identical duration-7.04 years-but considerably higher convexity of 244.8. 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? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. Zero Coupon Bond Actual loss ✓ Predicted loss ♥ Actual Predicted (7.05) X % (6.28) X % gain ✓ gain ✓ 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? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) Coupon Bond Zero Coupon Bond (10.25) X % (5.82)% Answer is not complete. % % Coupon Bond % %
An 8-year maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 155.1 and modified duration of 7.06 years. A 30-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 9% has nearly identical duration-7.04 years-but considerably higher convexity of 244.8. 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? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. Zero Coupon Bond Actual loss ✓ Predicted loss ♥ Actual Predicted (7.05) X % (6.28) X % gain ✓ gain ✓ 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? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) Coupon Bond Zero Coupon Bond (10.25) X % (5.82)% Answer is not complete. % % 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:An 8-year maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 155.1 and modified
duration of 7.06 years. A 30-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 9%
has nearly identical duration-7.04 years-but considerably higher convexity of 244.8.
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? (Input all amounts as positive values. Do not round
intermediate calculations. Round your answers to 2 decimal places.)
X Answer is complete but not entirely correct.
Zero Coupon
Bond
Actual
loss ✓
Predicted loss ✓
(7.05) X %
(6.28) %
gain
Actual
Predicted gain
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? (Input all amounts as positive values. Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Coupon Bond
(10.25) X %
(5.82) %
Answer is not complete.
Zero Coupon
Bond
%
%
Coupon Bond
%
%
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