You have been considering a zero-coupon bond, which pays no interest but will pay a principal of
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You have been considering a zero-coupon bond, which pays no interest but will pay a principal of \(\$ 1,000\) at the end of five years. The price of the bond is now \(\$ 712.99\), and its required rate of return is \(7.0 \%\). This morning's news contained a surprising development. The government announced that the rate of inflation appears to be \(5.5 \%\) instead of the \(4 \%\) that most people had been expecting. (Suppose most people had thought the real rate of interest was \(3 \%\).) What would be the price of the bond, once the market began to absorb this new information about inflation?
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Bond Price Adjustment After Inflation Surprise The unexpected rise in inflation from 4 to 55 will li...View the full answer
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Related Book For 
Foundations Of Financial Markets And Institutions
ISBN: 9780136135319
4th Edition
Authors: Frank J Fabozzi, Franco G Modigliani, Frank J Jones
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