In: Finance
Discount bond is a bond which after its original issue makes only one payment upon its maturity. This single payment accounts for repayment of principal (i.e., amount borrowed) plus interest. Consider discount bond G and discount bond C. Both G and C have the same face value and the same maturity. Bond G is a treasury bond and bond C is a corporate bond. All else equal
a. The Present Value of G is less than the Present Value of C b. The Present Value of G is the same as the Present Value of C c. Cannot tell d. The Present Value of G is greater than the Present Value of C
Option D is correct
The Present Value of G is greater than the Present Value of C
Treasury Bond will have lower return rate than corporate bond due to risk in corporate bond, so with lower discount rate Treasury Bond(Bond G) will have higher price