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Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is
Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
- What is the value of this bond?
- Now suppose the bond has no coupon payments (it is a "zero coupon" bond) but still pays $1000 in ten years. What is the value of this bond?
- What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
- Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
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