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A 10-year maturity zero-coupon bond selling at a yield to maturity of 6.75% (effective annual...

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Finance

A 10-year maturity zero-coupon bond selling at a yield to maturity of 6.75% (effective annual yield) has convexity of 170.7 and modified duration of 9.06 years. A 30-year maturity 8.5% coupon bond making annual coupon payments also selling at a yield to maturity of 6.75% has nearly identical duration9.04 yearsbut considerably higher convexity of 260.9. a. Suppose the yield to maturity on both bonds increases to 7.75%. 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 5.75%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule?

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