Question

Part 2, Answer “A” or “B” or “A=B”for the following. Put your answer in the column to the right. Assume ALL ELSE EQUAL, 18 points, 3 points each

1. Bond A has 15 years to maturity.  Bond B has 10 years to maturity.  All else equal, which bond has a lower value?

2. Bond A is a premium bond and Bond B is a par bond. All else equal, which bond has the lower coupon rate?

3. Bond A pays $100 per year.  Bond B has a coupon rate of 10%.  All else, equal, which bond will have the lower price?

4. Bond A is a convertible bond. Bond B is a callable bond. All else equal, which bond will have a higher coupon rate?

5. Bond A is an unsecured bond. Bond B is a secured bond. All else equal, which bond will have a higher coupon rate?

6. Credit Card A compounds daily.  Credit Card B compounds monthly.  Both credit cards have an APR of

25%.  Which credit card do you prefer?

Answer 1

Bond A has 15 years to maturity.  Bond B has 10 years to maturity.  All else equal, which bond has a lower value?

Ans: A. Bond with higher maturity will have lower value Thus Bond A will have Lower Value.

Bond A is a premium bond and Bond B is a par bond. All else equal, which bond has the lower coupon rate?

Ans: B. the bond with lower price will have lower coupon rate. thus Bond B will have lower coupon rate because it price is lower than Bond A

Bond A pays $100 per year.  Bond B has a coupon rate of 10%.  All else, equal, which bond will have the lower price?

Ans: A = B because the 10% coupon rate is equal to $100 when all else equal

Bond A is a convertible bond. Bond B is a callable bond. All else equal, which bond will have a higher coupon rate?

Ans: B. callable bond will have higher coupon rate because the company will buy back before maturity. in case of convertible bond the bond merely converted into stock but there is no total buy back of bonds

Bond A is an unsecured bond. Bond B is a secured bond. All else equal, which bond will have a higher coupon rate?

Ans: A. Unsecured bond has to offer higher coupon rate when compared with secured bond to attract the investors.

Credit Card A compounds daily.  Credit Card B compounds monthly.  Both credit cards have an APR of 25%.  Which credit card do you prefer?

Ans: B. Because interest compounded on monthly basis will be lower than interest charged on compounded on daily basis.