One of the factors that affect bond prices is time. There is a long term pattern and a short term pattern in this. According to my lecture notes they are:
Long-term pattern
- The price of discount or premium bond (greater or below the FV) will move towards par value over time.
Short term pattern:
- Between coupon payments, the prices of all bonds rise at a rate equal to the yield-to- maturity as the remaining cash flows of the bond become closer.
- After the payment, the price drops by the amount of the coupon.
Here is a diagram for short term:
can someone please explain why? Why does the price of the bond or prices of all bonds rise when the bond becomes closer to the next coupon payment? Why the drop? Can someone please explain the zig-ziggy pattern?
Thanks