FIN301: Financial Insituitions, Instruments ands Markets

(a) You are given the details of the following bonds: Maturity Bond rating

Bond A Bond B

Maturity 5 years 10 years

Bond rating AAA A

Coupon 5% 0%

Yield to maturity 4% 6%

(i) Based on the details of the two bonds, discuss why Bond B has a higher yield to maturity than Bond A. (8 marks)

(ii) Are there other reasons, besides those discussed in part (i) that can possibly explain the difference in yields and differentiate between them? (4 marks)