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You have just purchased a newly issued $100 five-year bond at par. This bond (bond A) pays $4 in interest semi-annually ($8 per year). You are also negotiating the purchase of a $100 six-year bond that pays $5 semi-annually and has five years to maturity (bond B).

a. What is the rate required in the market (the yield) on the bonds assuming that they have the same risk?

b. What should you be willing to pay (at most) for bond B?

c. How will your answer to part (b) change if bond A pays $3 (instead of $4) in semi-annual interest but still sells for $100?


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