Question

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Problem 19-1

Two 15-year maturity mortgage-backed bonds are issued. The first bond has a par value of \$10,000 and promises to pay a 11.0 percent

annual coupon, while the second is a zero coupon bond that promises to pay \$10,000 (par) after 15 years, with interest accruing at 10.5

percent. At issue, bond market investors require a 12.5 percent interest rate on both bonds.

Required:

a. What is the initial price on each bond?

b. Now assume that both bonds promise interest at 11.0 percent, compounded semiannually. What will be the initial price for each

bond?

c. If market interest rates fall to 100 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)?

Answer is complete but not entirely correct.

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Required A

Required B Required C

Now assume that both bonds promise interest at 11 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.)

Initial price

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vo.

JD VOID

voin

Bond 1

S 8,682 04

DISCORD

\$

Bond 2

774.27

< Required A

HI

Required C >

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