Bond X and Bond Y Are Both Issued by the Same

question 69

Multiple Choice

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 9% interest.The current market rate of interest is 8%.Which of the following is correct?

• A)Both bonds will sell for the same amount.
• B)Bond X will sell for more than Bond Y.
• C)Bond Y will sell for more than Bond X.
• D)Both bonds will sell at a discount.

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Definitions:

Substitution Effect

The change in consumption patterns due to a change in relative prices, leading consumers to substitute one good for another more or less expensive good.

Income Effect

The change in an individual's or an economy's consumption resulting from a change in real income.

Normal Good

A product whose demand increases as consumer income rises, indicating a direct relationship between income and demand for the good.

Income Effect

The change in an individual's or economy's consumption patterns resulting from a change in real income.