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QUESTION
The discount rate, rd, is the opportunity cost of capital, i., the rate that could be earned on alternative investments of equal risk. Rd = r* + IP...
+ ... The discount rate, rd, is the opportunity cost of capital, i.e., the rate that could be earned on alternative investments of equal risk. Rd = r* + IP + LP + MRP + DRP for debt securities. What"s the value of a 10-year, 10% coupon bond if rd = 10%? 0 10% V=? ... What if inflation increases by 3%, causing rd = 13%? When rd rises above the coupon rate, the bond"s value falls below par, so it sells at a discount. What would happen if inflation fell, and rd declined to 7%?
