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Suppose the current yield curve is as follows:
(a) Calculate the current market prices of two bonds with the following annual cash flows:
Bond A: A coupon of $60 is due immediately, and payable every 6 months until the bond matures in 2 years. The bond has a face value of $1, 000 payable in 2 years.
Bond B: A coupon of $20 is due immediately, and payable every 6 months until the bond matures in 2 years. The bond has a face value of $1, 000 payable in 2 years.
(b) Calculate the durations of the two bonds.
(c) Calculate the yield to maturity for each bond.
(d) Comment on the relationship between your answers to (b) and (c).
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