The Maryland Department of Transportation has issued 25-year bonds that make

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QUESTION:

The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.875 percent. The current market rate for similar securities is 11 percent.

a. What is the current market value of one of these bonds?

b. What will be the bond’s price if rates in the market (i) decrease to 9 percentor (ii) increase to 12 percent?

c. Refer to your answers in part b. How do the interest rate changes affect premium bonds and discount bonds?

d. Suppose the bond were to mature in 12 years. How do the interest rate changes in part b affect the bond prices?


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