1. Bond Practice (bonds are financial instruments, after all!)

1. If the discount rate is 4%, what is the market price of a bond with a one-year maturity, face value of $100, and coupon rate of 2 percent?

2. If the discount rate is 4%, what is the market price of a bond with a two-year maturity, face value of $100, and coupon rate of 2 percent?

3. Which bond price is higher, a or b? Explain the intuition behind this price difference.
4. Two bonds, both issued by the U.S. government, with the same face value, mature exactly one year from today. One has a coupon rate of 10%, and one has a coupon rate of 1%.

1. Which bond will command a higher market price?

2. Why might the two bonds have such drastically different coupon rates (hint: just because they mature on the same day doesnt mean they were issued with the same time to maturity)?

5. OPTIONAL/Challenge Problem: A bond is selling for $2,000. It has a face value of $1,000 and a coupon rate of 4%, but it never matures, it just makes coupon payments forever.

1. What do we call this type of bond?

2. Solve for the discount rate for this bond.