A government bond with face value $1,000 matures next year. This means that next year the government will send the bond holder a $1,000 cheque (the bond is not worth anything afterwards). If the interest rate is 2.8%, what is the bond’s market price today? Explain.
If the interest rate is 2.8%, then the bond’s market price today is 1,000/1.028 = 972.76.