Company X has the following bonds outstanding:

Bond A Bond B Coupon Maturity 8%

10 years Coupon Variable—changes annually to be comparable to the current rate Maturity 10 years Initially, both bonds sold at $1,000 with yields to maturity of 8 percent.

a) After two years, the interest rate on comparable debt is 10 percent. What should be the price of each bond?

b) After two additional years (i.e., four years after issue date), the interest rate on comparable debt is 7 percent. What should be the price of each bond?

c) What generalization may be drawn from the prices in questions

(a) and (b)?