Question

Other things remaining constant, which corporate bond would command a higher price? A 20 year semi-annual 9% coupon bond with a triple A bond rating or another with a B rating? Justify your answer.

Answer 1

A 20 year semi-annual 9% coupon bond with a triple A bond rating will command a higher Price.

Price of a Bond is dependent on 3 factors- Coupon rate, face value and the required rate of return.

The price of a bond is the discounted value of all coupon payments and the face value.

Ratings are assigned based on the performance and riskiness of the bond

AAA rating bond is less risky, and hence the required rate of return of investors will be lower.

However, a Bond with a B rating has higher risk and hence, will sell for a lower price since the expectations of the investors will be more