What will be the actual percentage capital gain on each bond

Reference no: EM132210877

Question 1 -

a. A bond currently sells for $1,200, which gives it a yield to maturity of 8%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to $1,155. What is the duration of this bond?

b. An eight-year bond has a yield of 9% and a duration of 7.204 years. If the bond's yield increases by 50 basis points, what is the percentage change in the bond's price as predicted by the duration formula?

c. You own a fixed-income asset with a duration of six years. If the level of interest rates, which is currently 7.0%, goes down by 15 basis points, how much do you expect the price of the asset to go up (in percentage terms)?

Question 2 -

A 12.58-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 146.5 and modified duration of 11.65 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration -11.79 years-but considerably higher convexity of 231.2.

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?

Reference no: EM132210877

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