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Imagine that the Korean government offers two types of one-year discount bonds in December 2017. The type A discount bond is a usual discount bond and pays its face value of 10 million won in December 2018. In December 2018, a holder of the type B discount bond will receive its face value of 10 million won and will be given a right to buy a three-year government bond directly from the government at a government price which is cheaper than the market price: the government price will be set at the market price of the three-year bond in December 2018 minus 1.5 mion won. The holder can sell the bond immediately if he wants. Suppose that the market price of the type B discount bond is 10.7 million won in December 2017.

(1) What is the equilibrium price for the type A discount bond in December 2017.

(2) What is the yield to maturity on the type B discount bond in December 2017.

(3) What is the one year interest rate (that is used for present value formula) in December 2017. Explain vour answers.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92770548

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