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 a 9.5% interest rate on both bonds.

A. What is the initial price of each bond?

B. Assume both bonds promise interest at 8.5%, compounded semiannually. What will be the initial price of each bond?

C. If market rates fall to 8.25% at the end of ten years, what will be the value of each bond, assuming annual payments as in 2A?