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Question 2.31: Sketch the graph of the price of the bond in Exercise 2.30 a...

Sketch the graph of the price of the bond in Exercise 2.30 as a function of the continuous compounding rate r. What is the value of this function for r = 0 ? What is the limit as r →\infty?

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The price of the bond as a function of the continuous compounding rate r can be expressed as 5e^{−r} +5e^{ −2r} +5e^{ −3r} +105e^{ −4r}. The graph of this function is shown in Figure S.1.When r \searrow 0 , the price approaches 5+5+5+105 = 120 dollars. In the limit as r \nearrow \infty the price tends to zero.

s.1

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