An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6 percent. One bond, Bond C, pays an annual coupon of 10 percent; the other bond, Bond Z, is a zero coupon bond.
a. Assuming that the yield to maturity of each bond remains at 9.6 percent over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:
|
t
|
Price of Bond C
|
Price of Bond Z
|
|
0
|
-
|
-
|
|
1
|
-
|
-
|
|
2
|
-
|
-
|
|
3
|
-
|
-
|
|
4
|
-
|
-
|
b. Plot the time path of the prices for each of the two bonds.