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What are the fair prices of the 2 bonds

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Reference no: EM131647394

1. Take a hypothetical US treasury bond with 2 years to maturity and an annual coupon rate of 3%. Coupons are paid semi-annually. Take another US Treasury bond with 3 years to maturity and the same coupon rate. Assume that the Annual Percentage Rate on 6-month deposits in the US is constant at 3%.

a) What are the fair prices of the 2 bonds?

b) If the US interest rate doubled to 6%, which bond would see the largest price change?

c) What is the intuition for the result you found in (b)?

Reference no: EM131647394

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