Question

22. Consider a 2-year zero-coupon bond and a 2-year coupon bond
that both have a face value of $100. The coupon bond has a coupon
interest rate equal to 5%. Both bonds currently have the same yield
to maturity of 6%. Which statement is FALSE?

A) Both bonds are trading at a discount.

B) The zero-coupon bond is trading at a discount but the coupon bond is trading at a premium.

C) The internal rate of return for both bonds is equal to each
other.

D) The coupon bond declines stronger in price than the zero-coupon
bond when their yield to maturity rises from 6% to 7% (compare the
declines in $ terms).

Ans: B

Answer #1

Price of zero coupon bond can be calculated by using the
following excel formula:

=PV(rate,nper,pmt,fv)

=PV(6%,2,0,-100)

= $89

Price of coupon bond can be calculated by using the following
excel formula:

=PV(rate,nper,pmt,fv)

=PV(6%,2,-5,-100)

= $98.17

The price of both bonds are below the face value. That means both bonds are trading at a discount. Thus, Statement B is false.

The statement "The zero-coupon bond is trading at a discount but the coupon bond is trading at a premium" is false.

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