You will invest (not investing is not a choice) in one of two bond issues issued

Question

You will invest (not investing is not a choice) in one of two bond issues issued by the same company. Both mature in 2035 (25 years to maturity). Both have a $1000 par value. The company has an Aa3 credit rating by S&P. Both bonds are callable at $1050 beginning in 2020 (10 years hence) with a 10 year call window. Neither issue has a sinking fund. Bond A is a zero coupon bond, currently priced at $233.00. Bond B has a coupon rate of 5%, pays interest annually, and has a current market price of $872.16.

(A) As an investor, what factors influence your decision as to which bond to buy? Why?

(B) What differences from the investor perspective, if any, exist in the risks between the two bond issues? Based on that, are both bonds fairly priced in the market relative to each other (explain how you reached that conclusion?)?

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