You are evaluating two similar bonds. Both mature in 4 years, both have a $1,000 par value, and both pay a coupon rate of 10 %. However, one bond pays that coupon in annual installments, whereas the other makes semiannual payments. Suppose you require a 10 % return on either bond. Should these bonds sell at identical prices or should one be worth more than the other? Use Equations 4.2a and 4.3a and let r = 10%. What prices do you obtain for these bonds? Can you explain the apparent paradox?
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