Question: Explain how the market rate below will be dependent upon the maturity. Describe what you believe to be the most persuasive theory associated with the

  • Explain how the market rate below will be dependent upon the maturity. Describe what you believe to be the most persuasive theory associated with the shape of market interest rates across the maturity spectrum (i.e., the yield curve)?

BOND FACE VAUE = $100 Million

Time to maturity= 5 years

coupon rate = 7%

Payments = 2 (semi-annually)

effective coupon rate per period: coupon rate/frequency of payments = 3.5%

Annual Interest rates = 4.5% Long term average federal rates adjusted for inflation (discount rates)

Period discount factor: Annual interest rate/frequency of payment = 2.3%

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