Question

13. Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?
A. Bond A trades at a discount, whereas Bond B trades at a premium.
B. If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
C. If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D. Bond A's current yield is greater than Bond B's current yield.
E. Bond A's capital gains yield is greater than Bond B's capital gains yield

Answer 1

Answer:

B. If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today

Explanation:

From the information given, that do not contain the price of the bond it is predictable that the Bond A will have higher value than Bond B if the YTM remains at 8% because the Coupon rate for bond A is higher than YTM. instead, the coupon rate for bond B is lower than YTM.

It also can be inferred that Bond B is trading as discount whereas Bond A is trading as Premium.