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.

If your query has been solved, please like the answer. Thanks!