A 30-year maturity bond with a face value of $1,000 making annual coupon payments with a coupon rate of 12% has a duration of 11.54 years and a convexity of 192.4. The bond currently sells at a yield to maturity of 8%. a. What is the current price of this bond? b. What would be the price of the bond if the yield falls to 7%? c. What price (if y = 7%) would be predicted by the duration rule? d. What price would be predicted by the duration-with-convexity rule? e. f. What is the percent error for each rule? What do you conclude about the accuracy of the two rules? Repeat your analysis if the bond's yield to maturity increases to 9%. Are your conclusions about the accuracy of the two rules consistent with your answers to parts b. to e. above?
A 30-year maturity bond with a face value of $1,000 making annual coupon payments with a coupon rate of 12% has a duration of 11.54 years and a convexity of 192.4. The bond currently sells at a yield to maturity of 8%. a. What is the current price of this bond? b. What would be the price of the bond if the yield falls to 7%? c. What price (if y = 7%) would be predicted by the duration rule? d. What price would be predicted by the duration-with-convexity rule? e. f. What is the percent error for each rule? What do you conclude about the accuracy of the two rules? Repeat your analysis if the bond's yield to maturity increases to 9%. Are your conclusions about the accuracy of the two rules consistent with your answers to parts b. to e. above?
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...
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