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A 5-year bond is a promise to a coupon payment of $100 for the next five following years. The first coupon payment is paid one
A 5-year bond is a promise to a coupon payment of $100 for the next five following years. The first coupon payment is paid one year from now. Finally, in the fifth year you also receive the $1,000 face value of the bond (a) If interests rates today are 2%, what is the price on the 5-year bond above? (b) Consider now a discount bond which is just a promise to $1,000 (the face value) one year from now. What is the price of this bond if interest rates today are 2%? (c) Suppose that interest rates today jump to 4%. Calculate the capital gain or loss for each of these bonds in percentage terms. Which one is higher? Provide intuition for your
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