What is the one-period rate of interest on discount bonds

Reference no: EM133246557

Case: The one-period bonds in our model pay a single interest payment or "coupon" of $R and a principal of $1. Alternatively, we could consider a one-period discount bond like a U.S. Treasury bill. This type of asset has no coupons but pays a principal of $1 next period. Let P^Bbe the dollar price for each unit of discount bonds, where each unit is a claim to $1 next period.

Question 1: Is P^Bgreater or less than $1?

Question 2: What is the one-period rate of interest on discount bonds?

Question 3: How does the price, P^B, relate to this one-period rate of interest?

Question 4: Suppose that instead of coming due next period, the discount bond comes due (matures) two periods from now. What is the interest rate per period on this bond? How do the results generalize if the bond matures j periods from now?

Reference no: EM133246557

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