bond value as maturity approaches

Question

Bond Value as Maturity Approaches
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.1%. One bond, Bond C, pays an annual coupon of 10%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.1% over the next 4 years, what will be the price of each of the bonds at the following time periods? Assume time 0 is today. Fill in the following table. Round your answers to the nearest cent.

t              Price of Bond C            Price of Bond Z
0 
1
2
3
4

Answer 1

t	Price of Bond C	Price of Bond Z
0	$1,029.09	$705.83
1	$1,022.74	$770.06
2	$1,015.81	$840.14
3	$1,008.25	$916.59
4	$1,000.00	$1,000.00

Naturally, as the time approaches maturity the price of both bonds converges to the face value (ie $1000). Since the ZCB pays no annual coupons, the price is significantly discounted and appreciates as it reaches maturation. On the other hand, the coupon-paying bond loses value as it approaches maturation (due to the loss of the value of the annual coupon payment).