About Labs has two bond issues outstanding with the following characteristics:
Issue | interest Rate | Maturity | Current Price |
A | 6% | 2008 | 115 |
B | 6% | 2012 | 118 |
Instructions
Answer the following questions regarding these bond issues:
a. Which issue, A or B, has the higher effective rate of interest? How can you tell?
b. Assume that the bonds of both issues have face values of $ 1,000 each. How much total interest does each bond from issue A provide investors in 12 months? How much total interest does each bond from issue B provide investors in 12 months?
c. Note that both issues are by the same company, have the same contract rate of interest, and have identical credit ratings. In view of these facts, explain the current price difference of each issue.
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