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:

Bond A has 7% annual coupon

Bond B has 9% annual coupon

YTM (market rate) 8%

Bond A yield for less than market market thus, they will be offered below ther face value to make it more profitable.

Bond B yield above market rate therefore; investors will accept to pay higher than face value up to yield market rate.

Both bonds, will move towards face value in the future as at maturity both will pay 1,000 regardless of the coupon payment and market rate.

We can conclude then:

Bond A is below 1,000 dollars one year from now will be closer from this value thus; higher value.