Use your knowledge of bond pricing to explain under what circumstances you would be willing to pay the same price for a consol that pays $5 a year forever, and a 5 percent, 10-year coupon bond with a face value of $100 that only makes annual coupon payments for 10 years, at which point principal is returned. You would be willing to pay the same price for the bonds if: the interest rate you use to discount future payments is lower than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol. O you expect to only be around for another 10 years. the interest rate you use to discount future payments is 5 percent. While the consol makes coupon payments forever, the 10- year coupon bond pays back the principal at maturity. the interest rate you use to discount future payments is higher than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol.
Use your knowledge of bond pricing to explain under what circumstances you would be willing to pay the same price for a consol that pays $5 a year forever, and a 5 percent, 10-year coupon bond with a face value of $100 that only makes annual coupon payments for 10 years, at which point principal is returned. You would be willing to pay the same price for the bonds if: the interest rate you use to discount future payments is lower than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol. O you expect to only be around for another 10 years. the interest rate you use to discount future payments is 5 percent. While the consol makes coupon payments forever, the 10- year coupon bond pays back the principal at maturity. the interest rate you use to discount future payments is higher than 5 percent, since that would ensure the 10-year bond would be worth the same as the consol.
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Use your knowledge of bond pricing to explain under what circumstances you would be willing to pay the same price for a consol that
pays $5 a year forever, and a 5 percent, 10-year coupon bond with a face value of $100 that only makes annual coupon payments for
10 years, at which point principal is returned.
You would be willing to pay the same price for the bonds if:
O the interest rate you use to discount future payments is lower than 5 percent, since that would ensure the 10-year bond would
be worth the same as the consol.
O you expect to only be around for another 10 years.
the interest rate you use to discount future payments is 5 percent. While the consol makes coupon payments forever, the 10-
year coupon bond pays back the principal at maturity.
the interest rate you use to discount future payments is higher than 5 percent, since that would ensure the 10-year bond would
be worth the same as the consol.
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