Price over timethe effect of time on coupon bond prices: Initially, bonds can trade at par, discount, or premium, but all bonds eventually approach the face value at the maturity. How so? In the lecture, we discussed how zero-coupon is issued at a discount then over time converges to face value. Now, lets consider a 5-year annual coupon bond with YTM of 5% and face value of $100. Assume annual coupon rate of 10%.

a. What is the price of the bond at issuance (P0)? Is this a par, discount, or premium bond?

b. What is the price of the bond immediately before (P1,before) the first coupon is paid? Compute the change in bond price (1 =P1,before P0). What is driving the change?

c. What is the price of the bond immediately after (P1,after) it makes its first coupon payment? Compute the change in bond price (2 =P1,after P1,before). What is driving the change?

d. Think about what happens to the coupon bond price over time. Compare the size of 1 and 2.