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Two 20-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay an 8.5% annual coupon, while the second is a zero coupon bond that promised to pay $10,000 (par) after 20 years, including accrued interest at 8%. At issue, bond market investors require an 8.5% interest rate on both bonds.

A. What is the initial price of each bond?

B. If the bonds are semiannual, then what is the initial price of each bond?

C. If market rates fall to 7.75% at the end of five years, what will be the value of each bond, assuming annual payments as in (A)?

D. Recalculate (C) assuming semiannual compounding and payments.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93049263

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