This question relates to the valuation of bonds.
Bradley White, a retired school teacher, has two 8 per cent per annum $100,000 Australian Government bonds that mature on 15 May 2020 and 15 May 2024 respectively. At the date of the last half-yearly interest payment, viz.,15 November, 2016, both bonds were selling at par.
Since then, interest yields on bonds have risen by 2% per annum, compounded half-yearly. Sarah now intends to sell the bonds and put a deposit on a country property.
i) Calculate the price she will receive from each bond if she sells on 15 May, 2017 at the new yield, immediately after receiving the interest payments due that day.
ii) Explain the relative price movements in the two bonds, as evidenced in your answer to i) above.