Question: In this chapter, we discussed Target Corporation bonds to illustrate the effect of default risk on the price of a bond. In particular, when the default risk rises, the demand for a bond falls and then the equilibrium price falls. In our example, the price of a $100,000 Target bond fell from $98,000 to $97,000.
a. What is the interest rate on a one-year $100,000 bond that sells for $98,000?
b. What is the interest rate on a one-year $100,000 bond that sells for $97,000?