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Suppose there is a 2-year Zero Coupon bond issued by the U.S. government that has a yield to maturity of 2% and a face value
Suppose there is a 2-year Zero Coupon bond issued by the U.S. government that has a yield to maturity of 2% and a face value of $1000. There is also a 2 -year Zero Coupon bond issued by a corporation that has a yield to maturity of 8% and a face value of $1000. Briefly explain which bond should sell for a higher price: the U.S. government bond or the corporate bond? Suppose there is an increase in uncertainty about the economy that causes the yield to maturity on the U.S. government bond to fall to 1% and the yield to maturity on the corporate bond to rise to 9%. Briefly explain if this is consistent with a flight to quality or not
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