Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding. The bonds are equally risky. The Burger King bond has an annual coupon rate of 8 percent and matures 20 years from today. The McDonald's bond has a coupon rate of 8 percent, with interest paid semiannually, and it also matures in 20 years. If the nominal required rate of return, rd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

Question

Quizplus · Accepted Answer

The McDonald's bond pays interest semiannually, so it will have more frequent compounding compared to the Burger King bond, which pays annually. This results in a slightly higher present value for the McDonald's bond, leading to a difference in their market prices.

Assume That McDonald's and Burger King Have Similar $1,000 Par