You are considering the purchase of one of two bonds. Both bonds have a principal
value of $1,000 and pay a 10% coupon, with annual interest payments. Bond S matures
in three years, however, while Bond L matures in 12 years. Both bonds are currently
selling for $1,000. You plan to hold whichever bond you purchase for only one year. If
you anticipate that the prevailing interest rate one year from now will be 8% per
annum, which bond should you purchase?

Question

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The Answer of You are considering the purchase of one of two bonds. Both bonds have a principal
value of $1,000 and pay a 10% coupon, with annual interest payments. Bond S matures
in three years, however, while Bond L matures in 12 years. Both bonds are currently
selling for $1,000. You plan to hold whichever bond you purchase for only one year. If
you anticipate that the prevailing interest rate one year from now will be 8% per
annum, which bond should you purchase?

You Are Considering the Purchase of One of Two Bonds