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6. a. Explain the following terms with respect to bond pricing and whether or not they are related to macroeconomic conditions?: i) Default Risk ii)
6. a. Explain the following terms with respect to bond pricing and whether or not they are related to macroeconomic conditions?: i) Default Risk ii) Inflation Risk (30 marks) The yield to maturity on 1-year zero coupon bonds is currently 4.5%; the yield to maturity on 2-year zeros is 5.5%. The treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 6%. The face value of the bond is $100. b. What will be the short rate of interest in year 2? (15 marks) C. What will be the bond price now? What will be the bond price at the end of year 1 assuming the short rate of interest for year 2 calculated in part b) holds. Briefly comment on your answers. (25 marks) d. Give two explanations for why the term structure of interest rates might be "inverted
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