Question
An investor has two bonds in his portfolio. Each bond matures in 10 years, has a face value of $1,000, and has a yield to
An investor has two bonds in his portfolio. Each bond matures in 10 years, has a face value of $1,000, and has a yield to maturity equal to 5 percent. One bond, Bond C, pays an annual coupon of 9%, the other bond, Bond Y, pays an annual coupon of 1%.
a) Assuming that the yield to maturity of each bond remains at 5 percent over the next 10 years, what will be the price of each bond at each of the following time periods: t=10, t=8, t=6, t=4, t=2, t=0 (t = # of years to maturity)?
b) Plot the time path of the prices for each of the two bonds (x-axis = years to maturity; y-axis = bond value)
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