You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a

Question

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Select one:

a. The price of Bond B will decrease over time, but the price of Bond A will increase over time.

b. The prices of both bonds will remain unchanged.

d. The prices of both bonds will increase by 7% per year.

e. The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.

Explanation / Answer

The correct answer is option C.

The coupon rate of Bond is greater than the yield to maturity thus the bond is issued at premium and it keeps on decreases when the time passes and will come to face value when the price of the bond reaches to face value.

The coupon rate of Bond is lesser than the yield to maturity thus the bond is issued at discount and it keeps on increases when the time passes and will come to face value when the price of the bond reaches to face value.

Therefore, the statement C is correct.

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