Question

3. Suppose that a one-year Treasury bond has a face value of $110,000.00 and is currently selling in the bond market for $100,000.00. This bond is safe, because the U.S. Treasury never defaults on its promises. For the sake of this question (and to make life easier for all of us), assume that the face value and the price of this bond will remain the same throughout the story.The Treasury issues another one-year bond with a face value of $58,300.00 and a starting price of $55,000. However, nobody buys this bond. People think it is too expensive. Consequently, the price of this bond in the bond market drops to dollars. 4. A one-year U.S. Treasury bond has a face value of S52,500.00 and is selling for $50,000.00 today. A corporation bond has a face value of $45,000.00. The corporation bond is quite risky and carries a risk premium of 20% over the Treasury bond. So, the price of the corporation bond in the market should be dollars.

Answer 1

(3) Face Value = $ 110000, Sale Price = $ 100000, let the interest rate be R %

Therefore, 100000 = 110000 / (1+R)

R = (110000/100000) - 1 = 0.1 or 10 %

New Bond Issue: Face Value = $ 58300 and Offer Price = $ 55000

Actual Price as per existing interest rate = P = 58300 / (1.1) = $ 53000

Therefore, the bond will start selling only when its price falls to $ 53000.

NOTE: Please raise a separate query for the solution to the remaining unrelated question as one query is restricted to the solution of only one complete question with up to four sub-parts.