The solution should be shown as calculator keystrokes (BA II Plus). No work shown in an Excel form.

Part A

A 5-year maturity mortgage-backed bond is issued. The bond is a zero-coupon bond that promises to pay $10,000 (par) after 5 years. At initial issue, bond market investors require a 6 percent interest rate return on the bond. You buy the bond but decide to sell after holding it for two years, at which time bond market investors are requiring a 9.50 percent interest rate return. What price did you pay and what is your selling price?

Part B

A 10-year maturity mortgage-backed bond is issued. The bond is a zero-coupon bond that promises to pay $10,000 (par) after 10 years. At initial issue, bond market investors require a 5.50 percent interest rate return on the bond. After holding the bond for five years you decide to sell and bond market investors require an 8 percent interest rate return. What is your annual yield for the five years you held the bond?