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The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on...

The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on 2-year zeros is 7.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon of 8.5%. The face value of the bond is $1,000.

  1. At what price will the bond sell?

  2. What will the yield to maturity on the bond be?

  3. If the expectations theory of the yield curve is correct, what is the market expectation of

    the price that the bond will sell for next year?

  4. Recalculate your answer to c. if you believe in the liquidity preference theory and you

    believe that the liquidity premium is 0.75%.

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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