A 13 15-year maturity zero-coupon bond selling at a yield to maturity of 3% (effective annual yield) has convexity of 1595 and modified duration of 12 18 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.) Actual loss Predicted loss Zero-Coupon Bond 11.41 % 11.38 % Coupon Bond 11:15 % 10.93% 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 ro

A 13 15-year maturity zero-coupon bond selling at a yield to maturity of 3% (effective annual yield) has convexity of 1595 and modified duration of 12 18 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.) Actual loss Predicted loss Zero-Coupon Bond 11.41 % 11.38 % Coupon Bond 11:15 % 10.93% 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 ro

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 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 12.75-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…
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-year-maturity zero-coupon bond selling at a yield to maturity of 9.25% (effective annual yield) has convexity of 161.1 and modified duration of 12.06 years. A 30-year-maturity 5.5% coupon bond making annual coupon payments also selling at a yield to maturity of 9.25% has nearly identical duration-12.04 years-but considerably higher convexity of 233.7. Required: a. Suppose the yield to maturity on both bonds increases to 10.25%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? b. Suppose the yield to maturity on both bonds decreases to 8.25%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? 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 10.25%. What will be the actual percentage capital loss…
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 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…
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…
● Calculate and interpret the Macaulay and modified durations of a a) 3-year 10% semi-annual bond (Bond C) when the required yield is 10%, and a b) 3-year zero-coupon bond (Bond D) when the required yield is 10% 16
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-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.…
The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) 1 5.03% YTM What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? 2 5.48% The price per $100 face value of the two-year, zero-coupon, risk-free bond is $ 3 5.79% (Round to the nearest cent.) 4 5.93% 5 6.04%
9. Consider price quotes and characteristics for two different bonds: Bond A Bond B Annual Coupon Payment Maturity Coupon Rate Yield to Maturity Annual 3 years 3 years 10% 6% 10.65% 10.75% Price 98.40 88.34 At the same time, you observe the spot rates for the next three years: Term Spot (Zero-Coupon) Rates 5% year 2 years 8% 3 11% years Demonstrate whether the price for either of these bonds is consistent with the quoted spot rates. Under these conditions, recommend whether Bond A or BondB appears to be the better purchase.

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