In the spring and summer of 2010, investors around the world became increasingly concerned about the financial condition of Greece. Large, sustained budget deficits produced an accumulated debt that was greater than the nations GDP. Between December 2009 and May 2010, a 10-year Greek government bond yield rose from 4% to 7% as fears mounted that Greece would not be able to fully repay its debt. Suppose that in December 2009 Greece issued a 10-year bond paying a 4% coupon semi-annually. Six months later, just after the first coupon payment, investors required a 7% return on Greek bonds. Assume the face value of this bond is 1000.

a.Calculate the bond price in December 2009.

b.Calculate how the price changed six months later after issue.

c.When a government borrow money from the public on a long-term basis, it usually does so by issuing debt securities, typically referred to as government bonds. Briefly discuss the innovations in bond market.