Business, 11.02.2021 22:10 brcribb

The bonds in our model have a maturity close to zero; they just pay the current interest rate, i, as a flow over time. We could consider, instead, a discount bond, such as a U. S. Treasury Bill. This type of asset has no explicit interest payments (called coupons) but pays a principal of, say, $1000 at a fixed date in the future. A Bill with one- year maturity pays off one year from the issue date, and similarly for 3-month or 6-month Bills. Let PB be the price of a discount bond with one-year maturity and principal of $1000. a. Is PB greater than or less than $1000. a. Is P^B greater than or less than $1000?
b. What is the one-year interest rate on these discount bonds?
c. If prises, what happens to the interest rate on these bonds?
d. Suppose that, instead of paying $1000 in one year, the bond pays $1000 in two years. What is the interest rate per year on this two-year discount bond?

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The bonds in our model have a maturity close to zero; they just pay the current interest rate, i, as...

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