Assume that McDonald's and Burger King have similar R1,000 par value bond issues outstanding.The bonds are equally risky.The Burger King bond has interest payments of R80 paid annually and matures 20 years from today.The McDonald's bond has interest payments of R80 paid semi-annually, and it also matures in 20 years.If the simple required rate of return, kd, is 12 percent, semi-annual 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 semi-annually, so it compounds more frequently than the Burger King bond, which pays annually. This results in a higher present value for the McDonald's bond, leading to a difference in market prices.

Assume That McDonald's and Burger King Have Similar R1,000 Par