Zumwalt Corporation's Class S bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months),and those bonds sell at their par value.Zumwalt's Class A bonds have the same risk,maturity,and par value,but the A bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Question

Quizplus · Accepted Answer

The annual payment bond should sell at the same price as the semiannual bond, which is at par value, $1,000. However, due to the difference in payment frequency, the annual bond's price is slightly adjusted to reflect the effective yield of the semiannual bond. The correct price is $993.01, which accounts for the difference in compounding.

Zumwalt Corporation's Class S Bonds Have a 12-Year Maturity,$1,000 Par