1. Suppose that investors demand an interest rate of 5% on a 3-year treasury bonds. What...
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1. Suppose that investors demand an interest rate of 5% on a 3-year treasury bonds. What would be the price of the treasury bond? PV = cpn (1+1) + cpn (1+r)² /cliff unturely ..+ (cpn+par) (1+r)' PV at 5%= $1000 So, when interest rate is the same as the coupon rate 5%, the bond sells for its face value. 2. Suppose that the interest rate is higher than the coupon rate at 8%, what is the value of the bond? PV at 8% $922.69 (Discount bond) So, when interest rate 8% is higher than the coupon rate 5%, the bond is worth less than its face value (the bond sells for 92.27% of face value) 1. Suppose that investors demand an interest rate of 5% on a 3-year treasury bonds. What would be the price of the treasury bond? PV = cpn (1+1) + cpn (1+r)² /cliff unturely ..+ (cpn+par) (1+r)' PV at 5%= $1000 So, when interest rate is the same as the coupon rate 5%, the bond sells for its face value. 2. Suppose that the interest rate is higher than the coupon rate at 8%, what is the value of the bond? PV at 8% $922.69 (Discount bond) So, when interest rate 8% is higher than the coupon rate 5%, the bond is worth less than its face value (the bond sells for 92.27% of face value)
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1 PRICE OF THE BOND PRICE F1rn where F is the face value 1000 r is the coupon rate 5 n is number ... View the full answer
Related Book For
Taxes And Business Strategy A Planning Approach
ISBN: 9780132752671
5th Edition
Authors: Myron Scholes, Mark Wolfson, Merle Erickson, Michelle Hanlon
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