MGFB10H3 Final: (4) B09 Summer08 AnsKey
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A 12-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 151.5 and modified duration of 11.06 years. A 30-year maturity 7% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical durationâ11.04 yearsâbut considerably higher convexity of 234.6. |
a. | Suppose the yield to maturity on both bonds increases to 8%. What will be the actual percentage capital loss/gain on each bond? What percentage capital loss/gain would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) |
Zero Coupon Bond | Coupon Bond | |
Actual : gain/loss | % | % |
Predicted : loss/gain | % | % |
b. | Suppose the yield to maturity on both bonds decreases to 6%. What will be the actual percentage capital loss/gain on each bond? What percentage capital loss/gain would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) |
Zero Coupon Bond | Coupon Bond | |
Actual : loss/gain | % | % |
Predicted : loss/gain | % | % |
Which investment returns a greater future value at time 10; A or B
INVESTMENT A
time | return | investment |
0 | $1,000.00 | |
1 | 3% | |
2 | 3% | |
3 | 3% | |
4 | 3% | |
5 | 3% | |
6 | 3% | |
7 | 3% | |
8 | 3% | |
9 | 3% | |
10 | 3% |
INVESTMENT B
time | return | investment |
0 | $1,000.00 | |
1 | -1% | |
2 | -1% | |
3 | 2% | |
4 | 3% | |
5 | 2% | |
6 | -3% | |
7 | 7% | |
8 | 6% | |
9 | 6% | |
10 | 4% |