The graph below illustrates the effects of the passage of time on bond prices when the yield to maturity (YTM) remains constant. The prices of four bonds are shown: a zero-coupon bond, a 3%-coupon bond, a 5%-coupon bond, and a 10%-coupon bond. All four are 30-year bond when first issued and make coupon payments annually, except the zero-coupon bond which doesn't pay any coupon. 200 180 160 10% Coupon Rate 140 120 100 5% Coupon Rate m 80 60 3% Coupon Rate 40 20 Zero Coupon 0 5 10 15 20 25 30 Year a) If yield to maturity (YTM) is the same for all four bonds, based on your observation of the graph, what must be the value of the YTM? (A numerical answer is required.) Explain your reason. b) In your own words, explain why all four prices coverage to the face value over time. That is, explain why the 10%-coupon bond price goes down and the prices of both the 3%- coupon bond and zero-coupon bond go up. c) In your own words, explain why the price of the three coupon paying bonds zigzags over time. Bond Price (% of Face Value) The graph below illustrates the effects of the passage of time on bond prices when the yield to maturity (YTM) remains constant. The prices of four bonds are shown: a zero-coupon bond, a 3%-coupon bond, a 5%-coupon bond, and a 10%-coupon bond. All four are 30-year bond when first issued and make coupon payments annually, except the zero-coupon bond which doesn't pay any coupon. 200 180 160 10% Coupon Rate 140 120 100 5% Coupon Rate m 80 60 3% Coupon Rate 40 20 Zero Coupon 0 5 10 15 20 25 30 Year a) If yield to maturity (YTM) is the same for all four bonds, based on your observation of the graph, what must be the value of the YTM? (A numerical answer is required.) Explain your reason. b) In your own words, explain why all four prices coverage to the face value over time. That is, explain why the 10%-coupon bond price goes down and the prices of both the 3%- coupon bond and zero-coupon bond go up. c) In your own words, explain why the price of the three coupon paying bonds zigzags over time. Bond Price (% of Face Value)