For each of the following 3 bonds: yield rate is the same,face value is $1000,each bond is redeemable at par and each bond is sold at a premium (P > C) .
I.A 10 year bond with annual coupons at 8%,sells for P_I
II.A 10 year bond with annual coupons at 6%,sells for P_II
III.A 20 year bond with annual coupons at 6%,sells for P_III
Which of the following statements regarding the prices of these bonds is true?

Question

Quizplus · Accepted Answer

Given that all bonds have the same yield rate and are sold at a premium, the bond with the highest coupon rate (8%) will sell for more than the bond with a 6% coupon rate for the same maturity (10 years), hence P_I > P_II. Between the 10-year and 20-year bonds with the same coupon rate (6%), the longer duration bond (20 years) will sell for more because it provides more interest payments over time, hence P_III > P_II.

For Each of the Following 3 Bonds: Yield Rate Is