The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase. Bond Characteristics Bond A Bond B Coupons Annual Annual Maturity 3 years 3 years Coupon rate 10% 6% Yield to maturity 10.65% 10.75% Price 98.40 88.34 Spot Interest Rates Term (Years) Spot Rates (Zero-Coupon) 1 5% 2 8 3 11

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter10: Long-term Liabilities

Section: Chapter Questions

Problem 10.1E

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The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase.

Bond Characteristics

Bond A Bond B

Coupons Annual Annual

Maturity 3 years 3 years

Coupon rate 10% 6% Yield to maturity 10.65% 10.75%

Price 98.40 88.34

Spot Interest Rates

Term (Years) Spot Rates (Zero-Coupon)

1 5%

2 8

3 11

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