Consider the following two bonds that pay interest annually: $\begin{array} { l c c }
\hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } \
\hline \text { A } & 5 \% & 2 \text { years } \
\text { B } & 3 \% & 2 \text { years } \
\hline
\end{array}$ At a market discount rate of 4%, the price difference between bond A and bond b per 100 of par value is closest to:
A) 3.70.
B) 3.77.
C) 4.00.

Question

Consider the following two bonds that pay interest annually: $\begin{array} { l c c } 
\hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } \
\hline \text { A } & 5 \% & 2 \text { years } \
\text { B } & 3 \% & 2 \text { years } \
\hline
\end{array}$ At a market discount rate of 4%, the price difference between bond A and bond b per 100 of par value is closest to:
A) 3.70.
B) 3.77.
C) 4.00.

Quizplus · Accepted Answer

The price of a bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the principal repayment at maturity. For bond A, with a 5% coupon rate, the present value of its cash flows at a 4% discount rate is: $PV_A = \frac{5}{(1+0.04)^1} + \frac{105}{(1+0.04)^2} ≈ 101.94$. For bond B, with a 3% coupon rate, the present value of its cash flows at a 4% discount rate is: $PV_B = \frac{3}{(1+0.04)^1} + \frac{103}{(1+0.04)^2} ≈ 98.17$. The difference in price per 100 of par value between bond A and bond B is approximately $101.94 - 98.17 = 3.77$.

Consider the Following Two Bonds That Pay Interest Annually At a Market Discount Rate of 4%, the Price Difference