A 13.35-year maturity zero-coupon bond selling at a yield to maturity of 8% jeffective 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% LWhat 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) Zero-Coupon Bond Coupon Bond Actual 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 the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) L.Actual gain Predicted gain 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
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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 the duration-with-convexity rule?
(Do not round intermediate calculations. Round your answers to 2 decimal places.)
i. Actual gain
ii. Predicted gain
Zero-Coupon Bond
%
%
Coupon Bond
%
%
Transcribed Image Text: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 the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) i. Actual gain ii. Predicted gain Zero-Coupon Bond % % Coupon Bond % %
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