A one-year discount bond issued by X has a payout of $1,250 and today's price is...
A one-year discount bond issued by X has a payout of $1,250 and today's price is $1,189. A one-year discount bond issued by Y has a payout of $382 and today's price is $354. Then the bond issued by X has a ____ yield than the bond issued by Y, and this could be because X has a ____ default risk.
Group of answer choices
a) higher; lower
b) lower; lower
c) lower; higher
d) higher; higher
Homework Answers
Answer is b) lower, lower
Explanation:
Yield is calculated by formula: payouts/price-1 (since it's a 1-year zero coupon bond)
yield for X =(1250/1189)-1 = .05 = 5%
yeild for Y= (382/354)-1 = .079 = 8%
Since higher yields indicate that risk associated with bond is higher(because you need to increase the yields of a bond to make it more attractive for people to buy), so answer is (b)
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