You are evaluating two similar bonds Both mature in 4 years, both have a $1,000 par value, and both pay a coupon rate of 10 However, one bond pays that coupon in annual installments, whereas the other makes semiannual payments Suppose you require a 10 return on either bond Should these bonds sell a...

Using equation 42a the bond that pays annual interest will sell at par valu ...

You are evaluating two similar bonds. Both mature in 4 years, both have a $1,000 par value,

Question:

You are evaluating two similar bonds. Both mature in 4 years, both have a $1,000 par value, and both pay a rate of 10 %. However, one bond pays that in annual installments, whereas the other makes semiannual payments. Suppose you require a 10 % return on either bond. Should these bonds sell at identical prices or should one be worth more than the other? Use Equations 4.2a and 4.3a and let r = 10%. What prices do you obtain for these bonds? Can you explain the apparent paradox?
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...