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 A's price will be higher than it is today because as time passes and it gets closer to its maturity date, its price will converge towards its face value, especially since its coupon rate is below the yield to maturity. Both bonds having the same yield to maturity and being identical in every aspect except for their coupon rates means they will have the same price today if the market is efficient. However, the price of each bond is not expected to remain constant; it will change as it approaches maturity and as interest rates fluctuate. Bond prices move inversely to yields, but since the yield is expected to remain constant, the primary factor affecting price changes over time will be the bond moving closer to its maturity value.

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