Question 1

A bond with a $1,000 face value and a 15 percent annual coupon rate matures in 20 years.

a)Determine the value of the bond to a friend of yours with a required rate of return of 15%.

b)A zero coupon bond with similar risk is selling for $180. The bond has a face value of $1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $900.