An investor has two bonds in his portfolio. Each bond matures in 12 years, has a face value of $1,000, and has a yield to maturity equal to 9 percent. One bond, Bond C, pays an annual coupon of 12%, the other bond, Bond Y, pays an annual coupon of 3%.
a) Assuming that the yield to maturity of each bond remains at 9 percent over the next 12 years, what will be the price of each bond at each of the following time periods: t=12, t=10, t=8, t=6, t=4, t=2, t=0 (t = # of years to maturity)?
b) Plot the time path of the prices for each of the two bonds (x-axis = years to maturity; y-axis = bond value)