Question
The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on 2-year zeros is 7.5%. The Treasury plans to issue
The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on 2-year zeros is 7.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon of 8.5%. The face value of the bond is $1,000.
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At what price will the bond sell?
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What will the yield to maturity on the bond be?
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If the expectations theory of the yield curve is correct, what is the market expectation of
the price that the bond will sell for next year?
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Recalculate your answer to c. if you believe in the liquidity preference theory and you
believe that the liquidity premium is 0.75%.
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