Question

A 30-year maturity bond making annual coupon payments with a coupon rate of 10.2% has duration of 11.03 years and convexity of 176.83. 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%.

b. What price would be predicted by the duration rule?

c. What price would be predicted by the duration-with-convexity rule?

d-1. What is the percent error for each rule?

d-2. What do you conclude about the accuracy of the two rules?

e-1. Find the price of the bond if its yield to maturity increases to 10%.

e-2. What price would be predicted by the duration rule?

e-3. What price would be predicted by the duration-with-convexity rule?

e-4. What is the percent error for each rule?

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

Answer 1