1. Suppose that you have the opportunity to invest in 2 different bonds. Both bonds have the same face value of $1000, the same maturity length of 2 years, and the same annual coupon payment of $50. The first bond is risk- free, while the second bond is risky. Assume that in the bond market the risk- free rate of interest is 2% and that the risk premium is 4%. A. Which of these 2 bonds would you expect to have the higher price? Explain. B. Calculate the market price of each of these 2 bonds.
1. Suppose that you have the opportunity to invest in 2 different bonds. Both bonds have the same face value of $1000, the same maturity length of 2 years, and the same annual coupon payment of $50. The first bond is risk- free, while the second bond is risky. Assume that in the bond market the risk- free rate of interest is 2% and that the risk premium is 4%. A. Which of these 2 bonds would you expect to have the higher price? Explain. B. Calculate the market price of each of these 2 bonds.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:1. Suppose that you have the opportunity to invest in 2 different bonds. Both
bonds have the same face value of $1000, the same maturity length of 2
years, and the same annual coupon payment of $50. The first bond is risk-
free, while the second bond is risky. Assume that in the bond market the risk-
free rate of interest is 2% and that the risk premium is 4%.
A. Which of these 2 bonds would you expect to have the higher price?
Explain.
B. Calculate the market price of each of these 2 bonds.
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