(1) What would be the value of the bond described in part d if, just after it...

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(1) What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond?

(2) What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond?
(3) What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)

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Corporate Finance A Focused Approach

ISBN: 978-1439078082

4th Edition

Authors: Michael C. Ehrhardt, Eugene F. Brigham

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