Bond X and Bond Y are both issued by the same company.Each of the bonds has a face value of $100,000 and each matures in 10 years.Bond X pays 8% interest while Bond Y pays 7% interest.The current market rate of interest is 7%.Which of the following is correct?

Question

Quizplus · Accepted Answer

When a company issues bonds, the difference between the interest rate paid on the bond and the market interest rate affects the price of the bond. If a bond pays a higher interest rate than the market rate, investors are willing to pay more for that bond, because they can get a higher return. If a bond pays a lower interest rate than the market rate, investors are not willing to pay as much for that bond, because they can get a better return elsewhere.

In this case, Bond X pays an interest rate of 8%, which is higher than the current market rate of 7%. Therefore, investors will be willing to pay more for Bond X in order to get that higher return. Bond Y, on the other hand, pays a lower interest rate than the market rate, so investors will not be willing to pay as much for it. As a result, Bond X will sell for more than Bond Y.

Bond X and Bond Y Are Both Issued by the Same