Question

16. Bond Price Movements Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 8.2 percent, a YTM of 6.2 percent, and 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond has a coupon rate of 6.2 percent, a YTM of 8.2 percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now assuming both bonds have a par value of $1,000? In 3 years? In 8 years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.

Answer 1

face value of bond same 1000$ and maturity period also same

the coupon rate and discounting rate were interchanged

miller coupon 8.2% and expected rate is 6.2% so the price decreased when with increase in period till 1000$

modigliani coupon rate 6.2% and expected rate 8.2% hence price increasing with increasing in time till 1000$