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?

Question

Quizplus · Accepted Answer

The initial price of a zero-coupon bond is calculated using the formula: Price = Par / (1 + r)^n, where Par is the face value, r is the interest rate, and n is the number of years. Here, Price = $10,000 / (1 + 0.15)^10 = $2,252.

A 10-Year Maturity Mortgage-Backed Bond Is Issued