A 12.75-year maturity zero coupon bond selling at a yield to maturity of 8% has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-11.79 years-but higher convexity of 231.2. (hint: portfolio duration is weighted average of individual asset’s duration),,a. Suppose the yield to maturity on both bonds increases to 9%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration –with-convexity rule?,decrease. Based on their investment performances, explain the attraction of convexity.
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