Question
1. a) I a hold a consol that pays coupon C in perpetuity. Current interest rate is i. Avg expectation is that market will not
1. a) I a hold a consol that pays coupon C in perpetuity. Current interest rate is i. Avg expectation is that market will not change. Find the price of consol today (1%) b) next period interest rate changes to i'. Find new price of the bond, if the bond is sold at the beginning of the next period what is the yield from the consol. Does the yield increase or decrease if i > i? [4%] c) suppose alternatively that the market expectations are that interest rate will change to i after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period? [5%
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