Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher FPV than Bond A.

Question

Quizplus · Accepted Answer

I. This statement cannot be determined from the information given since the coupon rates are not provided.
II. Bond B has a longer duration than Bond A since more of its cash flows are in the distant future.
III. Bond A is less price-volatile than Bond B since it has a larger portion of its cash flow in the earlier years and less in the later years.
IV. Bond B has a higher FPV than Bond A since it returns a higher percentage of its cost in the sixth year.

Corporate Bond a Returns 5 Percent of Its Cost in PV