Hi can anybode help me in this question....With one numerical example show how government bonds are priced and

their yields are calculated, and also explain how they provide the benchmark
for the cost of funds for other borrowers?

You can read about how U.S Treasury bond prices are calculated at

http://financial-dictionary.thefreedictionary.com/Dutch+auction

For the effective interest rate or "Yield to maturity", see
http://www.moneychimp.com/articles/finworks/fmbondytm.htm

Of course! I can explain how government bonds are priced and how their yields are calculated, as well as how they provide a benchmark for the cost of funds for other borrowers.

Pricing Government Bonds:
Government bonds are priced based on the concept of present value. The price of a bond is determined by discounting the future cash flows (interest payments and principal repayment) it promises to pay to the bondholder. The present value of these cash flows is calculated by using an appropriate discount rate.

For example, let's say we have a government bond with a face value of $1,000, a coupon rate of 5%, and a maturity of 5 years. The coupon payments are made annually. If the prevailing market interest rate for similar bonds is 4%, we can calculate the price of the bond as follows:

1. Calculate the annual coupon payment: $1,000 * 5% = $50.

2. Determine the present value of each coupon payment:
Year 1: $50 / (1 + 4%) = $48.08
Year 2: $50 / (1 + 4%)^2 = $46.28
Year 3: $50 / (1 + 4%)^3 = $44.63
Year 4: $50 / (1 + 4%)^4 = $43.12
Year 5: $1,050 / (1 + 4%)^5 = $41.74 (including principal repayment)

3. Sum up the present values of all cash flows:
$48.08 + $46.28 + $44.63 + $43.12 + $41.74 = $223.85.

Therefore, the price of the bond would be approximately $223.85 in this scenario.

Yield Calculation:
The yield on a bond is calculated by solving for the discount rate that equates the present value of its cash flows to its market price. It represents the annualized return an investor would earn if they held the bond until maturity.

To calculate the yield, you would need to use trial and error or utilize financial software or spreadsheets that have built-in functions to calculate yield.

Benchmark for Cost of Funds:
Government bonds are considered low-risk investments because they are backed by the government's ability to tax and raise funds. Their yields serve as a benchmark because they represent a risk-free rate of return. Other borrowers, such as corporations or municipalities, use government bond yields as a reference point to determine the cost of funds for their own borrowing. The interest rate they pay on their debt instruments is typically higher than the risk-free government bond yield to compensate for their additional risk.

By comparing the yield of a corporate bond to the yield of a government bond with similar characteristics (such as maturity and credit rating), investors and borrowers can assess the additional risk and determine an appropriate interest rate for lending or borrowing. This relationship between government bond yields and borrower's cost of funds is often referred to as the "risk premium."

I hope this example and explanation clarify how government bonds are priced, how yields are calculated, and how they provide a benchmark for the cost of funds for other borrowers.