Bond Example #$1$

Bonds A and B are both discount bonds with face value of $$100.$

Bond A has a maturity of $10$ years

Bond B has a maturity of $4$ years.

Assume that yield on both bonds is approximately $5\%.$

Suppose investors form the following expectations about yields on both bonds in the very near future $($assume no change in maturity after the yield change$).$

Probability Change in yield

$0\mathrm{.}5$ no change

$0\mathrm{.}25$ increase by $1$ percentage point

$0\mathrm{.}25$ decrease by $1$ percentage point