For each of the following pairs of Treasury securities (each with

$1,000

par value), identify which will have the higher price:

a. A three-year zero-coupon bond or a five-year zero-coupon bond?

b. A three-year zero-coupon bond or a three-year

4%

coupon bond?c. A two-year

5%

coupon bond or a two-year

6%

coupon bond?

a. A three-year zero-coupon bond or a five-year zero-coupon bond?

Which will have the higher price?(Select the best choice below.)

A.

A three-year zero-coupon bond, because the present value is received sooner and the future value is higher.

B.

A five-year zero-coupon bond, because the future value is received later and the present value is higher.

C.

A three-year zero-coupon bond, because the future value is received sooner and the present value is higher.

D.

A five-year zero-coupon bond, because the present value is received sooner and the future value is higher.

b. A three-year zero-coupon bond or a three-year

4%

coupon bond?

Which will have the higher price?(Select the best choice below.)

A.

Since they both have a three-year maturity, they are equal in price.

B.The three-year

4%

coupon bond, because the

4%

coupon bond pays interest payments; whereas the zero-coupon bond is a pure discount bond.

C.

The three-year zero-coupon bond, because the zero-coupon bond is risk-free.

D.The three-year zero-coupon bond, because a pure discount bond pays higher interest payments than a

4%

coupon bond.c. A two-year

5%

coupon bond or a two-year

6%

coupon bond?

Which will have the higher price?(Select the best choice below.)

A.The two-year

5%

coupon bond, because the coupon (interest) payments are higher, even though the timing is the same.

B.

Because they are both two-year coupon bonds, they are equal in price.

C.The two-year

5%

coupon bond, because the future value will be received sooner, therefore the present value must be higher.

D.The two-year

6%

coupon bond, because the coupon (interest) payments are higher, even though the timing is the same.