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Suppose the instantaneous interest rate, as a function of time, is given by r(t) = r2- (r2 r1)/(1+t). t>=o Find the yield and discount curves,
Suppose the instantaneous interest rate, as a function of time, is given by
r(t) = r2- (r2 r1)/(1+t). t>=o
Find the yield and discount curves, y(t) and DF(t), in terms of r1,r2. What do the parameters r1 and r2 represent? Using r1 = 5% and r2 = 7%, plot the two curves r(t) and y(t) for t = 0 30 on one plot. Plot the discount curve separately. If $100,000 is to be received in 15 years, determine its present value.
Consider a 10-year 10% coupon bond. determine the price of this bond. What would be its IRR yield? Again, using the discount yield curve, what coupon would be required for a 10-year bond to be priced at par (i.e., $100) and what would its IRR yield be?
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