Consider two 12% (coupon rate) $100 government bonds that differ only in that one matures in 2 years' time and the other in 5 years' time.  Both bonds pay the coupon annually.

1. What will be the price of each bond, given the required yield is 10% per annum? 
2. What will be the price of each bond, given the required yield is 14% per annum??

Explain the price movements in response to interest rate changes as evidenced by parts 1 and 2

Answer rating: 100% (QA)

To calculate the price of a bond we need to discount its cash flows by the required yield The cash f... View the full answer