How could I compute the price of bonds if I was provided only with percentage of annual coupon and YTM? and Bond's, Mayfair, W1

How could I compute the price of bonds if I was provided only with percentage of annual coupon and YTM?

You are considering two bonds. Bond A has a 8% annual coupon while Bond B has a 5% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. What will happen to the price of the two bonds over time and why?


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Answer by Math
Bond A is offering a rate higher than the market. Thus it will sell at a premium (as investors will be willing to pay more for the higher returns).

Over time Bond A's price will decrease, as the bond must be priced at the face value at maturity (because at maturity the only future cash flow from the bond is it's face value, this is assuming we are just a little bit of time after the last coupon being paid).


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On the other hand, Bond B is offering less than the market. So, it will need to sell at a discount (investors must be given capital gains to make up for the lower coupon rate, otherwise they would not hold the bonds).

For the same reason above, the bond must be priced at its face value on maturity date ( right before the face value is paided, but after the last cash coupon is paided).

So Bond B's price will increase over time, up to the face value.

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Bond's, Mayfair, W1


Image by Ewan-M
The menu at this bar in Mayfair. At Bond's, Dering Street.

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