1. Suppose that investors demand an interest rate of 5% on a 3-year treasury bonds. What would be the price of the treasury bond? PV = cpn (1+1) + cpn (1+r) /cliff unturely ..+ (cpn+par) (1+r)' PV at 5%= $1000 So, when interest rate is the same as the coupon rate 5%, the bond sells for its face value. 2. Suppose that the interest rate is higher than the coupon rate at 8%, what is the value of the bond? PV at 8% $922.69 (Discount bond) So, when interest rate 8% is higher than the coupon rate 5%, the bond is worth less than its face value (the bond sells for 92.27% of face value)