**Suppose the yield to maturity on both bonds increases to 8%. What**

A 14.05-year maturity zero-coupon bond selling at a yield to maturity of 7% (effective annual yield) has convexity of 160.0 and modified duration of 12.81 years. A 30-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 7% has nearly identical modified duration—-12.95 years—-but considerably higher convexity of 240.0.

a.

Suppose the yield to maturity on both bonds increases to 8%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Zero-Coupon Bond Coupon Bond

Actual loss % %

Predicted loss % %

b.

Suppose the yield to maturity on both bonds decreases to 6%. What will be the actual percentage capital gain on each bond? What percentage capital gain would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Zero-Coupon Bond Coupon Bond

Actual gain % %

Predicted gain % %

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