John and Karen are both considering buying a corporate bond with a coupon rate o

Question

John and Karen are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000 and a maturity date of January 1,2025. Which of the following statements is most correct?

a. because both John & Karen will receive the same cash flows if they each buy a ond, they both must assign the same value to the bond.

b. If John decides to buy the bond, then Karen will also decide to buy the bond (because markets are efficient).

c. John & Karen will only buy the bonds if the bonds are rated BBB or above.

d. John may determine a different value for a bond than ?Karen because each investor may have a different level of risk aversion, and hence a different required return.

Explanation / Answer

a. because both John & Karen will receive the same cash flows if they each buy a ond, they both must assign the same value to the bond.

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