Consider two 12% (coupon rate) $100 (face value) government bonds that differ only in that one matures in 2 years’ time and the other in 5 years’ time. Both bonds pay coupon annually.
1) What will be the price of each bond, given the required yield is 10% per annum?
2) What will be the price of each bond, given the required yield is 14% per annum?
3) Explain the price.