Bond X and bond Y both are issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?
A)Both bonds sell for the same amount.
B)Both X sells for more than bond Y.
C)Both Y sell for more than bond X.
D)Both bonds sell at a discount.

Question

Quizplus · Accepted Answer

When the market rate of interest is 8%, then bond X's 8% interest is comparable to the market rate, and so it is likely that bond X will sell at its par value of $100,000. However, bond Y's 9% interest is higher than the market rate, making it more attractive to investors. Therefore, bond Y will sell for more than bond X (at a premium).

Bond X and Bond Y Both Are Issued by the Same