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3. Someone buys a 5 year government treasury bond at $Pt a. b. c. Can the price be above face value? Why? Can the price be below face value? Why? If he/she wants to sell it after 2 years, will he/she makes a positive rate of return or negative rate of return? Explain.

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Answer #1

a) Yes. The price of the bond will be more than fair value in case the required yield on the bond is more than coupon rate provided by that bond.

b) Yes.

The price of the bond will be more than fair value in case the required yield on the bond is more than coupon rate provided by that bond.

c) The return after depends on the price of the bond and coupon rate. Price of the bond depend on the required rate of return. If in 2 years the required yield rises then she may earn negative return and vice versa

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