Consider the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default: You also observe the following spot interest rates from the current yield curve: Par value Coupons Maturity Coupon rate Yield to maturity Price Bond A $100 Annual 3 yrs 8% 10.25% 94.43 1 2 3 Bond B $100 Annual 3 yrs 4% 10.35% 84.31 Term (yrs) Spot Rates (zero coupon, %) 4% 7 10 Neither bond's price is consistent with the spot rates. Using the information in these displays, recommend either Bond A or Bond B for purchase. Justify your choice. Do not round intermediate calculations. Round your answers to the nearest cent The non-arbitrage price of Bond A: $ The non-arbitrage price of Bond B: $ -Select- appears to be the better purchase.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Consider the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default:
You also observe the following spot interest rates from the current yield curve:
Par value
Coupons
Maturity
Coupon rate
Yield to maturity
Price
Bond A
$100
Annual
3 yrs
8%
10.25%
94.43
1
2
3
Bond B
$100
Annual
3 yrs
4%
10.35%
84.31
Term (yrs) Spot Rates (zero coupon, %)
4%
7
10
Neither bond's price is consistent with the spot rates. Using the information in these displays, recommend either Bond A or Bond B for purchase. Justify your choice. Do not round intermediate calculations. Round your answers to the nearest cent.
The non-arbitrage price of Bond A: $
The non-arbitrage price of Bond B: $
-Select- ✓ appears to be the better purchase.
Transcribed Image Text:Consider the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default: You also observe the following spot interest rates from the current yield curve: Par value Coupons Maturity Coupon rate Yield to maturity Price Bond A $100 Annual 3 yrs 8% 10.25% 94.43 1 2 3 Bond B $100 Annual 3 yrs 4% 10.35% 84.31 Term (yrs) Spot Rates (zero coupon, %) 4% 7 10 Neither bond's price is consistent with the spot rates. Using the information in these displays, recommend either Bond A or Bond B for purchase. Justify your choice. Do not round intermediate calculations. Round your answers to the nearest cent. The non-arbitrage price of Bond A: $ The non-arbitrage price of Bond B: $ -Select- ✓ appears to be the better purchase.
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