Consider price quotes and characteristics for two different bonds: Bond A Bond B Coupon Payment Annual Annual Maturity 3 years 3 years Coupon Rate 10% 6% Yield to Maturity 10.65% 10.75% Price 98.40 88.34 At the same time, you observe the spot rates for the next three years: Term Spot (Zero-Coupon) Rates 1 year 5% 2 years 8% 3 years 11% Demonstrate whether the price for either of these bonds is consistent with the quoted spot rates. Under these conditions, recommend whether Bond A or Bond B appears to be the better purchase.

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