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Assume that a bond with a face value of 1.8 payable next year was orig- inally priced at 1.5, implying a yield-to-maturity of 20%. a)
Assume that a bond with a face value of 1.8 payable next year was orig- inally priced at 1.5, implying a yield-to-maturity of 20%. a) What type of bond is this? [3 points] b) Calculate the yield-to-maturity at a new price of 1.4. What does this imply about the relationship between prices and interest rates? (3 points) c) Return to the initial scenario when the price was 1.5. What happens to the price of the bond if the yield-to-maturity decreases to 10%? [3 points] d) Assume the bond is renegotiated and the maturity increased to 2 years (it will now only pay the face value two years from now). What happens to the price of the bond when the yield-to-maturity decreases from 20% to 10%? Are prices more responsive to changes in interest rates when the bond matures further ahead in the future? [3 points)
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