Problem 1) Bond Price Movements. Bond X is a premium bond making annual payments. The bond pays 9 percent coupon, has a YTM of 7 percent, and also has a 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 5 percent coupon , has YTM of 7 percent, and also has 13 years to maturity. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in one year? In three years? In eight years? In 12 years? In 13 years? Whats going on here? Illustrate answer by graphing bond prices versus time to maturity.
Problem 2) interest Rate Risk. Bond J is a 4 percent coupon. Bond S is a 14 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? If interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?