Consider an America Off-Line 30 year, semiannual bond. It is issued at par (coupon rate = 6%) today. Interest rates remain at 6% for 5 years, and then GRADUALLY, over 5 years rises to 7%, Then interest rates GRADUALLY fall over 10 years, reaching 5% when the bond has 10 years to maturity remaining. Interest rates then remain at 5 % for the remainder of its 30 year maturity.
Along a time line, sketch the profile of the bond price (NOT A PROFILE OF INTEREST RATES). BE AS PRECISE AS POSSIBLE IN DRAWING YOUR DIAGRAM. (I am not asking you to calculate the bond price, but rather just sketch the profile over time). NOTE THAT ALL INTEREST RATE CHANGES ARE GRADUAL RATHER THAN BEING IMMEDIATE SPIKES.
Please see the attached file.
The Bond price is present values ...
The solution provides a bond price analysis.