Question

Bond A has a 12-year maturity, a 5% semi-annual coupon, and a yield of 43%. Bond B has a 12-year maturity a 3% coupon, and a yield of 4,3%. What must be true about the two bonds? A. Bond B has greater interest-rate risk OB. Bond A must be speculative grade since it has a higher coupon and the same yield O G. Bond B must be speculative grade since it has a lower coupon and the same yield O D. Bond B is more valuable than bond A

Answer 1

Here,

Both Bonds A and B have same maturity of 12 years and same yield of 4.3% .

However,since the coupon rate of A is more than its yield, it shall have a market value more than its face value

and coupon rate of B is less than its yield, it shall have a market value lesses than its face value

As we don'tknow the face value of a bond, we cannot say whether bond A or B is more valuable. Even if the Both have the same face value, A shall have a higher value than B so Option D is not correct.

Further, As the yield of both the bonds is same, both the bonds must be viewed by the market as that of equal risk and hence bth Option B and C is not correct

Option A is the correct option because Bonds with lower coupon rates are more affected by changes in interest rates and hence carry higher interest rate risk . Hence, in this case, Bond B has higher interest rate risk.

So Option A is the correct answer