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Bond Yields and prices over time

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A bond investor is analyzing the following annual coupon bonds:

Issuing company Annual coupon rates
Murdoch Enterprises 6%
Irwin Incorporated 12%
Turner Metalworks 9%

Each of the bonds has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the graph below to indicate the path each bond's price, or value, is expected to follow.

Please clarify in the attached file, the labels on the graph to indicate the path each bond's price, or value is expected to follow.

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Solution Summary

Calculates bond prices over a period of time.

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A company with the name "Unique Motors Company" sells an issue of bonds on the first of January, 2001. These bonds are purchased at $960 per unit (i.e., the bonds had been issued at 96 percent of par), have an even 12 percent coupon rate payable semi-annually, and mature in two decades, that is on the last day of 2020.

1) Say a person buys that bond on the date of issuing at the price of issuing and predicts that they will keep hold of that bonds up until its date of maturity, the last day of 2020. What would their average annual rate of return be for this particular investment?

2) The going rate of interest on similar bonds falls to 8 percent over the two years following the issuing of these bonds. What is the new selling price?

3) Now, six years after the original date of issuing for these bonds, the interest rate on similar bonds has peaked at 14 percent. What is the new selling price today?

4) Finally, eight years on from the date the bonds were originally issued, they are selling at a market price of $925. What now if the bond's yield to maturity? Please also find the current yield and capital gains yield.

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