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Unformatted text preview: We calculate the predicted price change by solving = 11.54*(0.01/1.08)+ (0.5*192.4*(0.01) 2 )*$1,450.31=$168.92 The predicted price will equal ($168.92 + $1,450.31) = $1,619.23 The actual price @ 7% YTM is $1,620.45. The percentage error equals ($1,620.45$1,619.23)/$1,620.45= 0.00075 or 0.075% This result is low Using DurationwithConvexity Rule, assuming yield to maturity rises to 9%: We calculate the predicted price change by solving = 11.54*(0.01/1.08)+ (0.5*192.4*(0.01) 2 )*$1,450.31=$140.42 The predicted price will equal ($141.02 + $1,450.31)= $1,309.29 The actual price at a 9% yield to maturity is $1,308.21. The percentage error equals ($1,309.29 $1,308.21)/$1,308.21= 0.00083 or 0.083% This result is too high The durationwithconvexity rule gives us a more accurate approximation to the real change in price than we get from using only duration to estimate....
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 Spring '11
 Zhu
 Finance

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