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