Q3:

A 2 year bond with coupons at the end of each of its two years has face value 100 units and coupon rate of five per cent. Because the bond is a "safe refuge", during a period of uncertainty, its price is bid up.

a) Calculate, showing and briefly explaining your algebraic workings, to what level the (second hand market) price of the bond would need to rise in order that the yield received by a purchaser should fall to zero.

b) Carefully explain why bidders may be prepared to continue acquiring such the bonds, even if further market pressure causes it to return a negative yield.