1 Using present discounted value methods (and assuming continuous compounding) 2a) What price would investors pay for a safe government bond promising $80 in 10yrs time if the market ("going) yield on safe assets was 2%? 2b) What price would be paid for a promise of $80 in 5yrs time if government repayment was in doubt? Specifically, if investors assigned a 70% probability of full repayment, a 20% chance of getting $50 and a 10% chance of getting nothing back. Moreover, instead of discounting by the "going" safe yield of 2%, say investor risk-aversion required an additional 100bp of compensation (that is, investors demanded a risk premium taking the discount rate up to 3%) 2c) Further to b) what price would be paid for the risky promise if global bond investors become more pessimistic about the recovery of funds should the government default . Specifically, a 70% chance of full repayment would still be assumed but investors get worried that the chances of getting nothing back have risen to 30%. 2d) Say the government is paying an annualised nominal yield on its debt of 1% but the economy is weak with deflation (of 2%) expected to persist for the foreseeable future. What is the implied real interest rate? ) 1 Using present discounted value methods (and assuming continuous compounding) 2a) What price would investors pay for a safe government bond promising $80 in 10yrs time if the market ("going) yield on safe assets was 2%? 2b) What price would be paid for a promise of $80 in 5yrs time if government repayment was in doubt? Specifically, if investors assigned a 70% probability of full repayment, a 20% chance of getting $50 and a 10% chance of getting nothing back. Moreover, instead of discounting by the "going" safe yield of 2%, say investor risk-aversion required an additional 100bp of compensation (that is, investors demanded a risk premium taking the discount rate up to 3%) 2c) Further to b) what price would be paid for the risky promise if global bond investors become more pessimistic about the recovery of funds should the government default . Specifically, a 70% chance of full repayment would still be assumed but investors get worried that the chances of getting nothing back have risen to 30%. 2d) Say the government is paying an annualised nominal yield on its debt of 1% but the economy is weak with deflation (of 2%) expected to persist for the foreseeable future. What is the implied real interest rate? )