Question

Your grandfather is giving you an option to choose between two discount bonds. Both have the same coupon rate and required rate of return. However, one pays coupon annually and the other pays coupon semiannually. Which one would you choose?

Answer #1

If my grandfather is giving you an option to choose between two
discount bonds and both have the same coupon rate and required rate
of return. And if one pays coupon annually and the other pays
coupon semiannually, **then I will opt the bond that pays
coupon semiannually as its effective yield to maturity will be
greater than the bond pays coupon annually. Further, the
cost/current price of the bond pays coupon semiannually will be
comparatively low than the bond paying coupon
annually.**

**So, Answer: I would choose the bond pays coupon
semiannually.**

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