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One bond has a coupon rate of 8%, another a coupon rate of 12%. Both bonds pay interest annually, have 10-year maturities, and sell at a yield to maturity of 10%.a. If their yields to maturity next year are still 10%, what is the rate of return on each bond?b. Does the higher-coupon bond give a higher rate of return?

Respuesta :

Answer:

Explanation:

   The price of 8% bond must be lower than its face value to make the yield to maturity equal to 10%

Similarly , the price of 12 % bond must be higher than its face value to make the yield to maturity equal to 10%

Rate of return is always equal to yield to maturity .

So even if we do not know the face value of bond , we can infer that rate of return must be equal to yield to maturity .

b ) Higher coupon rate does not guarantee  higher rate of return because higher coupon than the prevailing rate of return in the market pulls down  the market price of the bond .

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