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 13.55-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.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter4: Bond Valuation
Section: Chapter Questions
Problem 22P: Yield to Maturity and Yield to Call
Arnot International’s bonds have a current market price of...
Related questions
Question
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.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning