Question

For each of the following pairs of Treasury securities​ (each with

$ 1 comma 000$1,000

par​ value), identify which will have the higher​ price:

a. A​ three-year zero-coupon bond or a​ five-year zero-coupon​ bond?

b. A​ three-year zero-coupon bond or a​ three-year

4 %4%

coupon​ bond?c. A​ two-year

5 %5%

coupon bond or a​ two-year

6 %6%

coupon​ bond?

a. A​ three-year zero-coupon bond or a​ five-year zero-coupon​ bond?

Which will have the higher​ price?  ​(Select the best choice​ below.)

A.

A​ five-year zero-coupon​ bond, because the present value is received sooner and the future value is higher.

B.

A​ three-year zero-coupon​ bond, because the present value is received sooner and the future value is higher.

C.

A​ five-year zero-coupon​ bond, because the future value is received later and the present value is higher.

D.

A​ three-year zero-coupon​ bond, because the future value is received sooner and the present value is higher.

Answer 1

a]

A​ three-year zero-coupon​ bond, because the future value is received sooner and the present value is higher. That is, the period of discounting is lower for a 3-year zero-coupon bond, and hence its price would be higher

b]

A 3-year 4% coupon bond would have a higher price than a 3-year zero-coupon bond. This is because zero-coupon bonds are issued at a deep discount as they dont include coupon payments over their life. The coupon bond's price would include the value of the coupon payments to be received over their life. Hence the coupon bond would have a higher price

c]

The 2-year 6% coupon bond. This is because it pays a higher coupon, and the current price would include the higher coupon payments