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Two 25-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 9.0 percent annual coupon,
Two 25-year maturity mortgage-backed bonds are issued. The first bond has a par value of $10,000 and promises to pay a 9.0 percent annual coupon, while the second is a zero coupon bond that promises to pay $10,000 (par) after 25 years, with interest accruing at 8.5 percent. At issue, bond market investors require a 10.5 percent interest rate on both bonds.
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Required A Required B Required C What is the initial price on each bond? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Bond 1 Bond 2 Initial price Required A Required B Required C Now assume that both bonds promise interest at 9 percent, compounded semiannually. What will be the initial price for each bond? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Bond 1 Bond 2 Initial price Required A Required B Required C If market interest rates fall to 8 percent at the end of the fifth year, what will be the value of each bond, assuming annual payments as in (a) (state both as a percentage of par value and actual dollar value)? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Bond 1 Bond 2 Value of bond in dollars Value of the bond in % of par %Step by Step Solution
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