The US government issures a 1-year bond with a face value of $5000 and a zero coupon. If the market interest rate is 20 percent. What will the market price of the bond be? If the bond price falls by 5%, what happens to its yield?
Answer:
For #1-- All you have to do is take the present value of the final payment:
5000/1.2 = 4,166.67
For #2:
Take 95% of 4,166.67 = 3958.33
You take 5000/1+x = 3958.33
solve
i have to say, i totally concur with the first answer.
cheers
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