Consider a $1000 face value 2-year government bond which provides coupons of 8% per annum paid semi-annually.
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Question:
Consider a $1000 face value 2-year government bond which provides coupons of 8% per annum paid semi-annually.
a) Calculate the current price of the bond if the interest rate over the period is constant at 5%.
- Price = $
b) Suppose the bond was being sold to you for $930 would you buy it?
If this bond is being sold to me for $930, I would (buy/not buy) it because it is being sold to me at a price (above/below) its present value.
c) If interest rates increase by 3 percentage points recalculate the price of the bond.
- Price = $
d) Given the increase in the interest rate, would you rather be holding long-term bonds or short-term bonds? Explain.
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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