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. At issue, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?

Question

Quizplus · Accepted Answer

The initial price of the bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity, discounted at the market interest rate of 12%. The calculation results in a price of approximately $6,863.

A 25-Year Maturity Mortgage-Backed Bond Is Issued