A. Suppose today's interest rate is 6%. Which bond is the better buy (A or B and by how much?) if both are offered to you at the same price and both have the same risk? Bond A has a face value of $1,000 and a coupon rate of 9% (paid at the end of the year) for the next 10 years when it matures. Bond B has the same face value and maturity date, but a coupon rate of 15% for the first five years and 3% for the last five years.
B. You sign up for a 25 year, $800,000 mortgage at an annual interest rate of 3%.
How much principle do you still owe the bank after 5 years?
