Two bonds have identical times to maturity, face value, and coupon rates. The current price of the first one is $105 and the second is being traded at $110. Which should have the higher yield to matury? Why? You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
Two bonds have identical times to maturity, face value, and coupon rates. The current price of the first one is $105 and the second is being traded at $110. Which should have the higher yield to matury? Why? You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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- Two bonds have identical times to maturity, face value, and coupon rates.
- The current price of the first one is $105 and the second is being traded at $110. Which should have the higher yield to matury? Why?
- You purchase the $110 bond today and sell it off next year at $108. What is its one-year
rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? - If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
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