eBook

Problem 13-05

Consider the characteristics of two annual pay bonds from the same issuer with the same priority in the event of default:

	Bond A		Bond B
Par value	$100		$100
Coupons	Annual		Annual
Maturity	3 yrs		3 yrs
Coupon rate	10%		6%
Yield to maturity	10.80%		10.90%
Price	98.04		88.00

You also observe the following spot interest rates from the current yield curve:

Term (yrs)	Spot Rates (zero coupon, %)
1	6	%
2	9
3	11

Neither bond's price is consistent with the spot rates. Using the information in these displays, recommend either Bond A or Bond B for purchase. Justify your choice. Do not round intermediate calculations. Round your answers to the nearest cent.

The non-arbitrage price of Bond A: $

The non-arbitrage price of Bond B: $

-Select-Bond ABond BItem 3 appears to be the better purchase.

EBOOK Problem 13-05 Consider the characteristics of two annual pay bonds from the authority in the event of Bond A Bonde $100 $100 Coupons A Maturity Syn Coupont 10 Yield to matury 10,809 10.04 Price 98.01 8.00 You also observe the following spot interest rates from the current and curve Term (yrs) Spotiates (ure coupon) Neither bond's price is consistent with the spot rates Ung the information in the recommend there or dond for purchase, utify your choice. Do not round Round your answers to the nearest cont The non-arbitrage price of Bond As Theron arbitrage price of Bond : appears to be the better purchase