[mch4]

Bond Price Movements Bond X is a premium bond making annual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 6 percent coupon, has a YTM of 8 percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be on year from now? In three years? In8 years? In 12 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.

I am not sure I am starting or doing this problem right.

I have the annual coupon rate of $80 for the first bond and $60 for the second bond. I don't need the problem solved I just need someone to help point me in the right direction on how to solve this problem.

[ArcSine]

Without computing any actual pricing, you can still say that any bond's price--absent any changes in market rates--will converge to its maturity amount with the passage of time. So a bond currently selling at a discount will see its price rise across time, as the distance to maturity diminishes. Similarly, the price of a bond selling at a premium will curve down as maturity approaches.

That's pretty intuitive, since any bond's price will = its maturity amount on the day immediately prior to maturity.

Same is still true even when you introduce market-rate changes, but such changes will produce jumps in an otherwise smooth curve as the bond's price converges inevitably to its maturity payoff amount.

In order to see this concept in action, though, you'll need to figure the expected prices of these two bonds at the given future points in time. Compute the present value of the cash flows that remain at each such time (the remaining coupon payments, plus the maturity payoff). The discount rate for the PV calcs is each bond's YTM--6% and 8%, respectively.

That ought to get you started.