You are considering 2 bonds that will be issued tomorrow. Both are rated triple

Question

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Explanation / Answer

answer is False: NSF bond will fetch more coupon interest over the time period due to time value of money and SF bons will be fetching less since its outstanding amount willl be deminishing however important thing to consider here is that you should assume that you cant invest for better int rates than bonds are giving.

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