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A bond for the Chelle Corporation has the following characteristics:
Par value - $1,000
Maturity - 12 years
Coupon - 10% annual coupon
Yield to maturity - 9.50%
Macaulay duration - 5.7 years
Convexity - 48
Assuming its yield to maturity declined by 200 basis points.
1. What is the actual percentage capital gain?
a. 15.31%
b. 13.56%
c. 10.78%
d. 14.24%
e. 12.92%
2. What price would be predicted by the modified duration rule?
a. $1,120.23
b. $1,082.75
c. $1,039.83
d. $1,178.96
e. $1,142.66
3. Calculate the price change ($) attributable to the convexity effect.
a. $23.41
b. $12.34
c. $5.46
d. $14.78
e. $9.94
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