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?

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Quizplus · Accepted Answer

Both bonds have a yield to maturity of 7%, which means their current market value is already discounted at this rate. However, as time passes, Bond A's higher coupon rate will become less attractive to investors, who may demand more than 7% yield for a similar bond, causing its price to decrease. On the other hand, Bond B's lower coupon rate will become more attractive, and investors may be willing to pay a premium above its market value to achieve a 7% yield, causing its price to increase. Therefore, the price of Bond A will decrease over time, but the price of Bond B will increase over time.

You Are Considering Two Bonds