Sal Bender, Not One of the Most Upstanding Citizens, Has

question 48

Multiple Choice

Sal Bender, not one of the most upstanding citizens, has just been arrested for financial fraud, after he cooked up a get-rich-quick scheme that enticed people to purchase $10 million worth of his interest-bearing bonds.He had promised the investors quarterly coupon payments of $50 each, and that he would return the face value of $1,000 at maturity in five years.The current market interest rate is 7%.His scheme was successful initially, but within four months, it blew up in his face when the police came for him at his beach house in Barbados.Based on your knowledge of bonds, what was the biggest flaw in Sal's scheme?

• A)Offering such a high yield to maturity compared to the current market rate tipped off the authorities.
• B)Making quarterly payments instead of semi-annual payments increased the upfront costs.
• C)Using interest-bearing instead of zero-coupon bonds required him to make coupon payments.
• D)There was no flaw in Sal's plan - he was just unlucky and got caught.

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