Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements best describes bonds?

Question

Quizplus · Accepted Answer

Bond A and Bond C both have coupon rates higher than the current YTM, which means they are selling at a discount. Over time, as the bonds approach maturity, their prices are expected to increase and approach par value. Bond B is selling at par, which means its current yield is equal to its coupon rate, and its price is expected to remain constant. Therefore, choice C is the best option as it correctly identifies the discount on Bond A and the potential for its price to increase over time.

Three $1,000 Face Value Bonds That Mature in 10 Years