2. A 10-year maturity mortgage-backed bond is issued. The bond is a zero-coupon
ID: 2803683 • Letter: 2
Question
2. A 10-year maturity mortgage-backed bond is issued. The bond is a zero-coupon bond that promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond? (A) (A) $2,252 (B) $2,472 (C) $8,696 (D) $10,0002. A 10-year maturity mortgage-backed bond is issued. The bond is a zero-coupon bond that promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond? (A) (A) $2,252 (B) $2,472 (C) $8,696 (D) $10,000
2. A 10-year maturity mortgage-backed bond is issued. The bond is a zero-coupon bond that promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond? (A) (A) $2,252 (B) $2,472 (C) $8,696 (D) $10,000
Explanation / Answer
value of the bond after 10 years = 10000$
Duration of the bond = 10 years
required rate of return = 15%
Current price of the bond = value of the bond on maturity * PV factor @15% for 10th year
Current price of the bond = 10000 * 0.2472
Current price of the bond = 2472$
Hence the initial price of the bond = 2472$
Option B:-
2472$
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