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A 30year maturity bond making annual coupon payments with a coupon rate of 140% has duration of 1136 years and convexity of 1864 The bond currently sells at a yield to maturity of 8% a Find

A 30-year maturity bond making annual coupon payments with a coupon rate of 14.0% has duration of 11.36 years and convexity of 186.4. The bond currently sells at a yield to maturity of 8%.

a. Find the price of the bond if its yield to maturity falls to 7%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price of the bond            $


b. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Predicted price            $



c. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Predicted price            $

d-1. What is the percent error for each rule? (Enter your answer as a positive value. 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

7%

%

%

 

d-2. 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.

e-1. Find the price of the bond if it's yield to maturity rises to 9%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price of the bond            $

e-2. What price would be predicted by the duration rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Predicted price            $


e-3. What price would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Predicted price            $

e-4. 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

9%

%

%

 

e-5. Are your conclusions about the accuracy of the two rules consistent with parts (a) – (d)?

 

Yes

 

No

 

Apr 18 2020 View more View Less

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