Suppose that x is the yield on a perpetual government bond, Ask an Expert

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Suppose that x is the yield on a perpetual government bond that pays interest at the rate of $1 per annum. Assume that x is expressed with continuous compounding, that interest is paid continuously on the bond, and that x follows the process

where a, x₀, and s are positive constants, and dz is a Wiener process. What is the process followed by the bond price? What is the expected instantaneous return (including interest and capital gains) to the holder of the bond?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91993424

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