Question

Bond Price Movements. Bond X is a premium bond making semiannual

payments. The bond has a coupon rate of 8.5 percent, a YTM of 7 percent,

and has 13 years to maturity. Bond Y is a discount bond making semiannual

payments. This bond has a coupon rate of 7 percent, a YTM of 8.5 percent,

and also has 13 years to maturity. What are the prices of these bonds today

assuming both bonds have a $1,000 par value? If interest rates remain

unchanged, what do you expect the prices of these bonds to be in one year? In

three years? In eight years? In 12 years? In 13 years? What’s going on here?

Illustrate your answers by graphing bond prices versus time to maturity

Answer 1

Bond X price today:

Bond Y price today:

Table and graph presenting convergence of bond price to the par value as the time to maturity of the bond decreases: