Bonds A and B are 15-year, $1,000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

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Quizplus · Accepted Answer

DBond prices move towards their face value as they approach maturity if the yield to maturity remains constant. Since both bonds have the same yield to maturity (8%) but different coupon rates, their prices today will be different due to the difference in coupon payments. However, Bond A, with a 7% coupon rate, is priced at a discount because its coupon rate is less than the yield to maturity, and its price will increase over time as it approaches maturity. Bond B, with a 9% coupon rate, is priced at a premium because its coupon rate is higher than the yield to maturity, and its price will decrease over time as it approaches maturity. However, the statement that both bonds have the same price today and that the price will remain constant is incorrect for bonds with different coupon rates and a constant yield to maturity. The correct statement is that Bond A's price will be higher than it is today because as time passes, the discount at which it is trading (since its coupon is less than the yield to maturity) will decrease as it gets closer to its face value at maturity.

Bonds a and B Are 15-Year, $1,000 Face Value Bonds