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The yield to maturity on one-year zero-coupon bonds is currently 7 percent; the YTM on two-year zeroes is 8 percent. The federal government plans to
The yield to maturity on one-year zero-coupon bonds is currently 7 percent; the YTM on two-year zeroes is 8 percent. The federal government plans to issue a two-year-maturity coupon bond, paying coupons once per year with a coupon rate of 9 percent. The face value of the bond is $100.
- At what price will the bond sell?
- What will be the yield to maturity on the bond?
- 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?
- If the liquidity preference theory is correct and you believe that the liquidity premium is 1 percent, what is the market expectation of the price that the bond will sell for next year?
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