Question

This Question: 1 pt 8 of 19 (13 complete) For each of the following pairs of Treasury securities (each with $1,000 par value), identify which will have the higher price A three-year zero coupon bond or a five-year zero-coupon bond? b. A three-year zero-coupon bond or a three-year 4% coupon bond? c. A two-year 5% coupon bond or a two-year 6% coupon bond? a. A three-year zero-coupon bond or a five-year zero-coupon bond? Which will have the higher price? (Select the best choice below.) O A. A three-year zero-coupon bond, because the present value is received sooner and the future value is higher OB. A five-year zero-coupon bond, because the present value is received sooner and the future value is higher OC. A three-year zero-coupon bond, because the future value is received sooner and the present value is higher OD. A five-year zero-coupon bond, because the future value is received later and the present value is higher b. A three-year zero-coupon bond or a three-year 4% coupon bond? Which will have the higher price? (Select the best choice below) O A. The three-year zero-coupon bond, because the zero-coupon bond is risk-free.

Answer 1

All parts have been answered. Please give a thumbs up if you find this helpful :)

Part a)

Correct Answer: Option C ) A three-year zero-coupon bond because the future value is received sooner and the present value is higher

Option A and Option B are incorrect as present value cannot be received sooner as it is at time=0. The formation of the sentence is wrong.

Option D is incorrect because for future value received later present value is lesser as there exists no coupon payment for a zero-coupon bond

Part b)

Correct Answer: Option D) The Three year 4 % Coupon bond because a 4% coupon bond pays interested payment. whereas, a zero-coupon doesn't.

Option A is incorrect, a zero-coupon bond need not be risk-free, and being risk-free is not the sole criterion to decide the higher price.

Option B is wrong owing to the fact that a 4 % coupon bond pays annual interest payment and other doesn't. They have the same maturity but cannot have the same price.

Option C is incorrect as a pure discount bond doesn't pay any interest payment until maturity where it is only redeemed at face value.

Option D fits well in all the parameters discussed above.

Part c)

Correct Answer: Option B) The two 6% coupon bond because coupon(interest) payments are higher , even though the timing is the same.

Option A is fundamentally incorrect as a 5% coupon paying bond would pay $ 50 and a 6% coupon paying bond would pay $ 60 (with $ 1000 as the face value)

Option C is wrong as timing is same for the bonds as mentioned clearly.

Option D is incorrect for a coupon paying bond. They would have been priced at par only for pure discounted bonds.