investment finance – A 30-year maturity bond making annual coupon payments with a coupon

investment finance – A 30-year maturity bond making annual coupon payments with a coupon

A 30-year maturity bond making annual coupon payments with a coupon rate of 16.0% has duration of 10.55 years and convexity of 161.7. The bond currently sells at a yield to maturity of 9%.

a.	Find the price of the bond if its yield to maturity falls to 8% or rises to 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

YTM	Price
8%	$
10%	$

b.	What prices for the bond at these new yields would be predicted by the duration rule and the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

YTM	Duration Rule	Duration-with- Convexity Rule
8%	$	$
10%	$	$

c.	What is the percent error for each rule? (Do not round intermediate calculations. Round “Duration Rule” to 2 decimal places and “Duration-with-Convexity Rule” to 3 decimal places.)

	Percent Error
YTM	Duration Rule	Duration-with- Convexity Rule
8%	%	%
10%	%	%

d.	What do you conclude about the accuracy of the two rules?

The duration rule provides more accurate approximations to the actual change in price. The duration-with-convexity rule provides more accurate approximations to the actual change in price.

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