Bond A has a coupon rate of 10% and a yield of 13%. Bond B has coupon rate of 5% and sells for the same price as Bond A. Both bonds have the same face value and maturity. From this, which of the followings is the most inappropriate statement?A.The yield of Bond B is greater than 5%.B.Bond A is a discount bond.C.Both bonds are discount bonds.D.The yield of Bond B is less than 10%.
Question
Bond A has a coupon rate of 10% and a yield of 13%. Bond B has coupon rate of 5% and sells for the same price as Bond A. Both bonds have the same face value and maturity. From this, which of the followings is the most inappropriate statement?A.The yield of Bond B is greater than 5%.B.Bond A is a discount bond.C.Both bonds are discount bonds.D.The yield of Bond B is less than 10%.
Solution
To answer this question, we need to understand the concepts of coupon rate, yield, and discount bonds.
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Coupon Rate: This is the annual interest rate paid on a bond's face value. For Bond A, it's 10%, and for Bond B, it's 5%.
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Yield: This is the total return you receive by holding the bond until maturity. For Bond A, it's 13%.
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Discount Bond: This is a bond that is purchased for less than its face value.
Now, let's analyze each statement:
A. The yield of Bond B is greater than 5%: This statement could be true. If Bond B sells for the same price as Bond A, and Bond A has a yield of 13%, then it's possible that Bond B's yield is also higher than its coupon rate of 5%.
B. Bond A is a discount bond: This statement is true. Since the yield (13%) is greater than the coupon rate (10%), Bond A is selling for less than its face value, making it a discount bond.
C. Both bonds are discount bonds: This statement could also be true. If Bond B is selling for the same price as Bond A, and Bond A is a discount bond, then Bond B could also be a discount bond.
D. The yield of Bond B is less than 10%: This statement is the most inappropriate. If Bond B is selling for the same price as Bond A, and Bond A has a yield of 13%, then it's likely that Bond B's yield is also higher than 10%.
Therefore, the most inappropriate statement is D. The yield of Bond B is less than 10%.
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