Problem 3. Some bond calculus. (Hint: for this exercise, the formula for a geometric series...
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Problem 3. Some bond calculus. (Hint: for this exercise, the formula for a geometric series might be useful: if q 1, then 1-q I will assume in the future, that this formula is well known. 1. Suppose a coupon bond has a face value F0 to be repaid after n years and promises to pay a coupon C equal to an interest rate of r percent of that face value for all years t = 1, . . . ,n (Note: I am using the notation x rather than i for the interest rate: that seems easier to read.). Currentlgy, ie in year t = 0, it is trading at price P (a) Given n, find an equation, expressing the relationship between P/F on the left hand side and an expression in i and x/i on the right hand side, assuming 0 b) For what P does the yield equal the interest rate? c) Suppose n-oo and i >0. What is the formula in that case? Briefly describe, how i relates to P. For F-1000 and x = 5%, plot the yield i as a function of the price P, as the price varies from P 500 to P 1500
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