The tables below show, respectively, the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase. Justify your choice.
|
Bond Characteristics |
|
|||
|
Bond A |
Bond B |
|
||
|
Coupons |
Annual |
Annual |
|
|
|
Maturity |
3 years |
3 years |
|
|
|
Coupon rate |
10% |
6% |
|
|
|
Yield to maturity |
10.65% |
10.75% |
|
|
|
Price |
98.40 |
88.34 |
|
|
|
Spot Interest Rates |
||||
|
Term (Years) |
Spot Rates (Zero Coupon) |
|||
|
1 |
5% |
|||
|
2 |
8 |
|||
|
3 |
11 |
|||