Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?

Both bonds will sell for the same amount.

Bond X will sell for more than Bond Y.

Both bonds will sell at a premium.

Bond Y will sell for more than Bond X.

Question

Business

Bethany Roach

7 September, 04:48

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?

Both bonds will sell for the same amount.

Bond X will sell for more than Bond Y.

Both bonds will sell at a premium.

Bond Y will sell for more than Bond X.

+5

Answers (1)

Know the Answer?

Xzavier · Answer 1

Bond X will sell for more than Bond Y.

Explanation:

Bonds pay a fixed interest rate throughout until maturity. A bond with a higher interest rate will pay more interest. The two bonds, in this case, have similar characteristics apart from interest rates. Bond X will sell more because of

Bond X has a higher interest rate than Bond Y. Bond X will be more attractive as it will give better returns. The purpose of making any investment is to earn profits. In this case, Bond X promising more profits than Bond Y. Bond X has a higher return than the market rates. For bond Y, an investor will have a choice between the Bond and other investments. in other words, Bond Y will be competing with the market. But for Bond X, it has a better return than the market. Investors will prefer Bond X more than the market and bond Y