Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher PV than Bond A.
A)III only
B)I,III,and IV only
C)I,II,and IV only
D)II and IV only
E)I,II,III,and IV

Question

Quizplus · Accepted Answer

Bond A has a higher final year return (75% vs. 60%), which suggests it pays more at the end, potentially indicating a longer duration since duration measures the weighted average time to receive the bond's cash flows. Bond B, with a higher annual return (8% vs. 5%), might have a lower present value (PV) due to its lower final year return, not higher, making IV incorrect. The information provided does not directly indicate which bond has a bigger coupon or which is less price-volatile, as these aspects depend on factors not specified in the question, such as the bonds' face values, market interest rates, and the exact nature of their cash flows.

Corporate Bond a Returns 5 Percent of Its Cost in PV