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.

Question

Quizplus · Accepted Answer

Bond SF, which has the sinking fund, would generally be expected to have a lower yield than Bond NSF due to the additional security provided by the sinking fund. Therefore, if the prices of the bonds are equal, it is unlikely that they are in equilibrium.

Are Considering 2 Bonds That Will Be Issued Tomorrow Both