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Actual percentage capital loss on each bond

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Reference no: EM132497724

A 12.25-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 139.2 and modified duration of 11.34 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.

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. 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.)

Reference no: EM132497724

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