1. A 25-year maturity mortgage-backed bond is issued. The bond has a par value o
ID: 2803681 • Letter: 1
Question
1. A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. Assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond? (C) (A) $6,835 (B) $6,863 (C) $7,653 (D) $14,270 1. A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. Assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond? (C) (A) $6,835 (B) $6,863 (C) $7,653 (D) $14,270 1. A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. Assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond? (C) (A) $6,835 (B) $6,863 (C) $7,653 (D) $14,270Explanation / Answer
Market Price of the bond can be calculated using PV function on a calculator
N = 5, PMT = 8% x 10,000 = 800, FV = 10,000, I/Y = 15%
=> Compute PV = $7,653
Hence, C is the correct answer.
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