Consider 3 Treasury bonds which pay semi-annual coupons. Bond A has 5 years remaining to maturity and a coupon rate of 10%. Bond B has 20 years remaining to maturity and a coupon rate of 10%, and Bond C has 20 years remaining to maturity and a coupon rate of 4%.
Using Excel, create a single graph showing the price of Bonds A & B for varying YTMs. Let YTM range from 0.5% to 18% per year (compounded semi-annually) in increments of 50 basis points (1 basis point is 1/100 of a percent – thus examples of a 50 basis point change would be a change from 4.5% to 5% or 11.2% to 11.7%). Is the graph linear? If not, what shape is it? Does a change in YTM affect the price of each of the two bonds the same way? Why or why not?
Create a similar graph for Bonds B & C. Is the graph linear? If not, what shape is it? Does a change in YTM affect the price of each of the two bonds the same way? Why or why not?