In this question I want you think about what happens to bond prices over time. Suppose that you purchased a bond with the following characteristics:Face Value = $ 100,000, Annual payments, Coupon rate 6%, Maturity 20 years. Please answer the following questions:1 ptsS [1] The yield to maturity for similar bonds is 2%. Assume the yield remains at this level. [a] How much did you pay for the bond at time zero, (price of the bond at time 0)? [b] What is the price of the bond at time 1, after the first coupon has been paid?[cl What is the price at time 2? [d] is the price increasing or decreasing over time?[2] Now, assume that the YTM is 10%. Compute the prices at time 0, 1, and 2. Is the price increasing or decreasing over time?[3] Compare [1] and [2]. Is this what you expected? Why is the price falling in one of the cases, and increasing in the other? Is this going to be true for other bonds? Can you provide either a finance intuition or a math proof to support your claim?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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In this question I want you think about what happens to
bond prices over time. Suppose that you purchased a
bond with the following characteristics:Face Value = $
100,000, Annual payments, Coupon rate 6%, Maturity
20 years. Please answer the following questions:1 ptsS
[1] The yield to maturity for similar bonds is 2%.
Assume the yield remains at this level. [a] How much did
you pay for the bond at time zero, (price of the bond at
time 0)? [b] What is the price of the bond at time 1,
after the first coupon has been paid?[cl What is the
price at time 2? [d] is the price increasing or decreasing
over time?[2] Now, assume that the YTM is 10%.
Compute the prices at time 0, 1, and 2. Is the price
increasing or decreasing over time?[3] Compare [1] and
[2]. Is this what you expected? Why is the price falling
in one of the cases, and increasing in the other? Is this
going to be true for other bonds? Can you provide
either a finance intuition or a math proof to support
your claim?
Transcribed Image Text:In this question I want you think about what happens to bond prices over time. Suppose that you purchased a bond with the following characteristics:Face Value = $ 100,000, Annual payments, Coupon rate 6%, Maturity 20 years. Please answer the following questions:1 ptsS [1] The yield to maturity for similar bonds is 2%. Assume the yield remains at this level. [a] How much did you pay for the bond at time zero, (price of the bond at time 0)? [b] What is the price of the bond at time 1, after the first coupon has been paid?[cl What is the price at time 2? [d] is the price increasing or decreasing over time?[2] Now, assume that the YTM is 10%. Compute the prices at time 0, 1, and 2. Is the price increasing or decreasing over time?[3] Compare [1] and [2]. Is this what you expected? Why is the price falling in one of the cases, and increasing in the other? Is this going to be true for other bonds? Can you provide either a finance intuition or a math proof to support your claim?
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