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Suppose you want to buy a two - year government bond that promises to pay $ 5 0 next year and $ 1 0 5

Suppose you want to buy a two

-

year government bond that promises to pay $

50

next year and $

1050

year. If you buy it for less than $

1000

you will earn a return

(

interest rate

)

of over

5 % . [

Hint: Calculate

the present value of the payments streams assuming a

5 %

discount rate.

]

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