Two Bonds Are Identical Except for Their Maturity

question 42

Multiple Choice

Two bonds are identical except for their maturity.The bonds have a coupon rate that is greater than their yield to maturity.Which of the following is true when comparing the two bonds?

• A) The longer maturity bond has a greater premium (is priced farther above par).
• B) The longer maturity bond has a smaller premium (is priced above par but closer to par).
• C) The longer maturity bond has a greater discount (is priced farther below par).
• D) The longer maturity bond has a smaller discount (is priced below par but closer to par).

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Definitions:

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements and is often used to assess the cost of a company’s financing through equity issuance.

Coupon Rate

Each year's interest rate on a bond displayed as a percentage of the bond's face value.

Cost of Capital

The minimum earnings rate a corporation must achieve on its projects to sustain its market valuation and draw in investments.

After-Tax Cost of Debt

The net cost of debt to a company after accounting for the tax deductions obtained on interest payments.