Question

My
grandfather is giving me an option to choose between two premium
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 suggest me to choose? Why?

Answer #1

Now that both the bonds have same coupon rate as well as the required rate of return, You should prefer semi-annual coupon payments.

Reason: Semi-annual payment system gives you the same cash flow but half of it in adavance and as per the concept of time value of money, a dollar in hand today is worth than receiving the same amount in future. Therfeore, the present value will more in this scenario.

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Your grandfather is giving you an option to choose between two
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Short Answer

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