On 1 June, 2019, immediately after payment of the interest duethat day, Tim Shaw bought two bonds each with a face value of$100,000 and a coupon rate of 8% p.a., paid half-yearly. The firstbond will mature on 1 December 2021 and the second bond will matureon 1 December 2025. At the date of purchase, both bonds wereselling at par. Since then, yields on bonds have risen by 2% pa,compounded half-yearly. Tim now intends to sell the bonds and put adeposit on a house.
a. Calculate the price he will receive from each bond if hesells on 1 September, 2019 at the new yield. (Hint: There are 92days from 1 June, 2019 to 1 September, 2019, and 183 days from 1June, 2019 to 1 December, 2019 – in both cases, ignoring the firstday and including the last day of the period.)
b. Explain the relative price movements in the two bonds, asevidenced in your answer to part a above.
