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Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?
Both bonds will sell for the same amount.
Bond X will sell for more than Bond Y.
Both bonds will sell at a premium.
Bond Y will sell for more than Bond X.

Respuesta :

Samawati

Answer:

Bond X will sell for more than Bond Y.

Explanation:

Bonds pay a fixed interest rate throughout until maturity.  A bond with a higher interest rate will pay more interest.  The two bonds, in this case, have similar characteristics apart from interest rates. Bond X will sell more because of

  1. Bond X has a higher interest rate than Bond Y.  Bond X will be more attractive as it will give better returns. The purpose of making any investment is to earn profits.  In this case, Bond X promising more profits than Bond Y.
  2. Bond X has a higher return than the market rates. For bond Y, an investor will have a choice between the Bond and other investments. in other words, Bond Y will be competing with the market. But for Bond X, it has a better return than the market. Investors will prefer Bond X more than the market and bond Y

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