A bond with a par value of $1,000 and a 10% coupon rate will mature in 15

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Question:

A bond with a par value of $1,000 and a 10% coupon rate will mature in 15 years.

Assuming that the coupon is paid annually, determine the value of this bond if your cost of debt is 13%.

Now, there is a zero-coupon bond with similar risk and same maturity selling for $180. The par value of this zero-coupon bond is also $1,000. Assume that the market price of the bond in part a is $820, which bond (the coupon bond in part a and zero coupon bond in part b) should you invest in, or both, or none of them ?

Explain briefly whether a zero-coupon bond will be selling (i) at a premium, and (ii) at par.

How are the cash flows of a zero-coupon bond different from those of a coupon bond ? Explain the implication(s) of the difference(s) with respect to their effective maturity (or duration).

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