A discount bond that pays interest semiannually will:
I. Have a lower price than an equivalent annual payment bond
II. Have a higher EAR than an equivalent annual payment bond
III. Sell for less than its conversion value

Question

Quizplus · Accepted Answer

I. A discount bond typically sells for less than its face value, and if it pays interest semiannually, it will have a lower price compared to an equivalent bond that pays annually due to the more frequent compounding of interest.II. The effective annual rate (EAR) will be higher for a bond that pays semiannually compared to one that pays annually because of the compounding effect of receiving interest payments more frequently.III. The statement about selling for less than its conversion value is not applicable to the comparison between semiannual and annual payment bonds, as conversion value typically refers to convertible securities and their relation to the underlying stock price, not the payment frequency of interest.

A Discount Bond That Pays Interest Semiannually Will