Consider a bond that promises to pay (a coupon) $100 one year from now, (a coupon) $100 two years from now, (a coupon) $100 three years from now, and (the principal) $3,000 three years from now. Let's say the market interest rate is 4.5% per year. Assume the bond is risk-free. a. If the bond is offered for $2,800, should you buy the bond at this price? Explain why or why not. b. What would be the bond price in market equilibrium?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
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Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 17P
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Consider a bond that promises to pay (a coupon) $100 one year from now, (a coupon) $100 two
years from now, (a coupon) $100 three years from now, and (the principal) $3,000 three years
from now. Let's say the market interest rate is 4.5% per year. Assume the bond is risk-free.
If the bond is offered for $2,800, should you buy the bond at this price? Explain why or
why not.
a.
b. What would be the bond price in market equilibrium?
Transcribed Image Text:Consider a bond that promises to pay (a coupon) $100 one year from now, (a coupon) $100 two years from now, (a coupon) $100 three years from now, and (the principal) $3,000 three years from now. Let's say the market interest rate is 4.5% per year. Assume the bond is risk-free. If the bond is offered for $2,800, should you buy the bond at this price? Explain why or why not. a. b. What would be the bond price in market equilibrium?
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