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There exist two coupon bonds with equal time to maturity (5 years) and face values ($1000). They pay coupons semi-annualy. The coupon rate for Bond A is 8% paid annually and the coupon rate for Bond B is 13% paid annually. Bond A and Bond B are trading at $900 and $1350 per bond, respectively.
Show your work in every step to determine the prices of:
(a) An annuity with time to maturity 5 years and face value of $1000
(b) A zero coupon bond with time to maturity 5 years and face value of $1000
Do you think that the APR calculated in (a) reflects the likely return that the lender will receive over the term of the loan? List specific reasons that the lender's actual return might be different from the APR.
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