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A firm has issued two bonds, Bond A and Bond B. The two bonds are identical in all respects except for the factors considered below.
A firm has issued two bonds, Bond A and Bond B. The two bonds are identical in all respects except for the factors considered below. Explain how the differences might be expected to result in the two bonds having different yields to maturity. In giving your answers, assume the bonds differ in no other ways, i.e., treat each feature described independently of the others. (i) Bond A matures in 5 years and Bond B matures in 10 years. (ii) Bond A is a zero-coupon bond whereas the coupon rate on bond B is equal to its yield to maturity. (iii) Bond A can be converted by the bondholders into shares of the firm at a pre-specified price. Furthermore, holders of Bond A have the right to have the bonds redeemed prior to maturity date. Bond B has neither of these embedded option features. (iv) Investors will not have to pay tax on the interest they receive from Bond B whereas they will have to pay tax on income from bond A. (v) Bond A is traded in an active secondary market. Bond B is not
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