2.) Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years
ID: 2775947 • Letter: 2
Question
2.) Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true?
Select one:
a. Both bonds must sell for the same price if markets are in equilibrium.
b. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.
c. The zero coupon bond must have a higher price because of its greater capital gain potential.
d. All rational investors will prefer the 8% bond because it pays more interest.
3.) Which of the following statements is MOST correct?
Select one:
a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate.
b. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield (interest yield) must also exceed its coupon rate.
c. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its face value.
d. Answers B and C are correct.
Explanation / Answer
2)correct option is "B" -The zero coupon bond must sell for a lower price than the bond with 8% coupon rate
Price of other bond = $ 1000 [as yield = coupon rate ,therefore it means bond is elling at par]
price of zero coupon bond = face value *pvf@8%,10
= 1000 * .46319
=463.19
3)Correct option is "D" -bOthe B and C are correct
If YTM is more than coupon rate ,bond is selling at disount (less than face value)
if YTM is more than coupon rate ,Bond current yield will be higher than its coupon rate as the bond is selling at discount so if we divided interest by a lower price ,current yield will be higher.
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