Question 1. Assume that the Treasury sold a $100,000, 30 year bond exactly twenty five years ago. That bond carried a coupon rate of 10.75%. Also assume that today a five year Treasury security yields 3.0%. How much would that 25 year old bond sell for today? (Note: for simplicity purposes only, assume annual interest payments on the bond - though Treasury bonds actually pay interest semi-annually - and assume also that the next interest payment date is exactly one year from now.)
Question 2. Assume that you have the opportunity to buy a 30 year, zero coupon, $50,000 bond. You determine that the yield on a comparable bond (comparable in terms of risk, liquidity, etc.) is 4.0%. How much should you pay (maximum) for the bond? Assume an efficient market.