Question

question 1 True or False with a discount bound, the return on the bond is equal to the rate of capital Explain o r gain Supplement your awwers with maths and lon graphs un awowers Quaftionai I suppose that people in France decide to permanently increar their paving rate Predict what will happen to the French bond Market in the future . Can France expe it higher or lower domootic interest rates ? Supplement your awowers with maths and / on graphs O.

Answer 1

Question 1]

False. A discount bond is one where the bond does not pay periodic interest. The bond is issued at a discount to its face value, and the face value is repaid at maturity. The difference between issue price and face value is the interest. This difference could also be treated as capital gains. However, it does have the character of interest. Hence, this statement is false.

For example, a bond of face value $100 with 1 year to maturity is issued at $97. The difference of $3 is the interest component. It could alternatively be treated only as capital gain and not interest, but this is subjective and depends on the purpose of classification.