1. Suppose that people expect the one-year interest rate will equal 1% forever. a. Consider a ten-year zero coupon (discount) bond with a face value of $1000. The bond has a current price of $910. Is the term premium positive or negative? b. Redo question (a), assuming that the bond has a current price of $900.
1. Suppose that people expect the one-year interest rate will equal 1% forever. a. Consider a ten-year zero coupon (discount) bond with a face value of $1000. The bond has a current price of $910. Is the term premium positive or negative? b. Redo question (a), assuming that the bond has a current price of $900.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![1. Suppose that people expect the one-year interest rate will equal 1% forever.
a. Consider a ten-year zero coupon (discount) bond with a face value of
$1000. The bond has a current price of $910. Is the term premium
positive or negative?
b. Redo question (a), assuming that the bond has a current price of
$900.
c. Using FRED, plot the behavior of the term premium on a 10-year zero
coupon bond over the past 25 years in the US.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcb2c2cd8-69c0-4d51-98cb-6a7b53f9b219%2F9060bb6d-68b3-4f32-a50a-2b775c2aed1e%2Flmesf65_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1. Suppose that people expect the one-year interest rate will equal 1% forever.
a. Consider a ten-year zero coupon (discount) bond with a face value of
$1000. The bond has a current price of $910. Is the term premium
positive or negative?
b. Redo question (a), assuming that the bond has a current price of
$900.
c. Using FRED, plot the behavior of the term premium on a 10-year zero
coupon bond over the past 25 years in the US.
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