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	8%		4%
Yield to maturity	10.60%		10.70%
Price	93.60		83.54

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

Term (yrs)	Spot Rates (zero coupon, %)
1	4	%
2	7
3	10

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.