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# Bond purchase decision

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You are considering investing in a security that matures in 10 years with a par value of \$1,000. During the first five years, the security has an 8 percent coupon with quarterly payments (i.e., you receive \$20 a quarter for the first 20 quarters). During the remaining five years the security has a 10 percent coupon with quarterly payments (i.e., you receive \$25 a quarter for the second 20 quarters). After 10 years (40 quarters) you receive the par value.

Another 10-year bond has an 8 percent semiannual coupon (i.e., the coupon payment is \$40 every six months). This bond is selling at its par value, \$1,000. This bond has the same risk as the security you are thinking of purchasing. Given this information, what should be the price of the security you are considering purchasing?

#### Solution Preview

Since the securities are of equal risk, they must have the same effective rate. Since the comparable 10-year bond is selling at par, its nominal yield is 8 percent, the same as its coupon ...

#### Solution Summary

Determine NPVs of securities.

\$2.19

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