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What will be the price of the zero-coupon bond

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Reference no: EM133111506

Question - Freda Lid is planning to issue 5-year bonds with a face value of $1,000 to fund their new project in Japan. The current market rate is 6%. Assume that coupon payments will be semi-annual. The company is trying to decide between g issuing a 7% coupon bond or a zero-coupon bond.

Required -

a) Is the coupon bond selling at par or at a discount or at a premium? Why? What about the zero-coupon bond? Is it selling at par or at a discount or at a premium? Why?

b) What is the price of the coupon bond?

c) What will be the price of the zero-coupon bond?

d) If the interest rate increases by 2%, which bond will have higher interest rate risk? Explain.

Reference no: EM133111506

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