Assume the yield curve is upward sloping and does not change over time. The investment horizon is one year. Bond A is a intermediate term bond (let’s say 5 years bond). Bond B is a long term bond (10 years maybe). Bond C is a short term bond (2 years). Which bond has the strongest price appreciation after one year horizon and why?
Without knowing each bond’s coupon rate, and the 1-year, 2-year, 4-year, 5-year, 9-year, and 10-year YTMs, you cannot say.
The higher the coupon, the larger price appreciation, right?
How about they are all zero coupon bonds?
Um . . . nope.
Rather than asking us, you should work this out on your own.
Create a yield curve in Excel. Use the PRICE (or PV) built-in function to calculate the price for various bonds today and one year from today.
Seriously, you’ll learn a lot more by doing this on your own than by asking us. Besides, it’s fun. Trust me on this.
Will do, thanks.
You’re welcome.
Please come back and let us know what you’ve learned.