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A 30-year maturity bond making annual coupon payments with a coupon rate of 12% sells at a yield-to-maturity of 10%.
a) What is the yield-implied price for the bond?
b) Compute duration and convexity for the bond.
c) Find the price of the bond if the yield-to-maturity increases to 11%.
d) What prices for the bond at this yield would be predicted by the duration rule and the duration with convexity rule?
e) What is the percentage error for each rule?
f) What do you conclude about the accuracy of the two rules?
Shown work would be appreciated.
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