Two 25-year old maturity mortgage- backed bonds are issued. the first bond has a par value of $10000 and promise to pay a 10.5% annual coupon while the second is a zero coupon bond that promises to pay $10000 (par) after 25 years, including accrued intrest at 10%. At issue bond market investors require a 12% interest rate on both bonds.
a) What is the initial price on each bond?
b) Assume both bonds promise interest at 10.5%. compounded semiannually, what will be the initial price at each bond?
c) If market rates falls to 9.5% at the end of 5 years, what will be the value of each bond, assuming annual payments area as in (a) state both as a percentage of par value and actual dollar value.