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Suppose a bond has a current market price of $250, its coupon payment during the year will be $20 and the interest rate, adjusted for the bond's risk is 5%.
a. If the bond market is efficient, what is the market price of the bond expected to be in one year?
b. Suppose the bond issuer increases the coupon payment during the year to $30, with the same interest rate and the same current market price, what is the expected market price if the bond market is efficient?
c. Compare your answers of (a) and (b), explain briefly why the expected prices change in this way following the changes of coupon payment.

Econometrics, Economics

  • Category:- Econometrics
  • Reference No.:- M9482760

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