Question

An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?A)Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.B)One year from now, Bond A's price will be higher than it is today.C)Bond A's current yield is greater than 8%.D)Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.E)Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Answer 1

Answer:B. One year from now Bond A's price will be higher than it is today.

Explanation:A Noncallable bond is a bond whose investment cannot be redeemed before its maturity date by the issuer, it can only be redeemed after the payment of a penalty.

The issuer of a noncallable bond makes itself vunerable to interest rate risk mainly because, at the issuance of the bond, it is locked to the interest rate it will pay only when the bond's maturity date is achieved.

Coupon rate is the rate at which a bond repay its owner,it can be annual.