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Question:

Each of the option‐free bonds listed below has a face value of $1,000:
If the yield to maturity for both the bonds remains constant over their remaining terms, over time there will most likely be an increase in the price of:

A Bond 1 only.
Explaination

• Bond 1 will be trading at a discount because its coupon rate is lower than the discount rate.
• Bond 2 will be trading at a premium because its coupon rate is greater than the discount rate.
• If yields remain constant until maturity, only Bond 1’s price will increase as it converges to its par value.