You are asked to analyze two annual-pay bonds: 1,000 General Electric 2.00% coupon bond, maturing 2023 with a yield-to-maturity of 2.50%; 1,000 Wal-Mart 2.00% coupon bond, maturing 2033 with a yield-to-maturity of 2.50%.
a. Compute the prices of the bonds.
b. Suppose all yields-to-maturity immediately fall by 1%. Explain what will happen to the Wal-mart bond’s price relative to par (No calculations are necessary for this part – whether now it is less than or greater than par, and whether it will it end up less than or greater than par, and why).
c. Identify which bond should have a greater percent change in price for a 1% decrease in yield, and explain why.
d. Compute the price of the General Electric bond, assuming YTM stays at 2.50% and one year pass.