Two investors are each issued one bond with the same face value, maturity date, and yield. After both bonds have reached maturity, it is discovered that one of the bondholders received a greater total return on her investment. If all expected payments were received, which of the following could explain the difference in return?(1 point)
Responses
One of the bonds was a corporate bond while the other was a savings bond.
One of the bonds was a corporate bond while the other was a savings bond.
One of the bonds was sold at face value while the other was sold below face value.
One of the bonds was sold at face value while the other was sold below face value.
One of the bonds earned greater interest payments than the other.
One of the bonds earned greater interest payments than the other.
One of the bonds was a municipal bond while the other was a savings bond.
One of the bonds earned greater interest payments than the other.
The correct response is: One of the bonds earned greater interest payments than the other.
The difference in return between the two bonds could be explained by one or more of the following possibilities:
1. One of the bonds was a corporate bond while the other was a savings bond: Corporate bonds and savings bonds have different risk profiles and interest rates. Corporate bonds are issued by corporations and typically offer higher yields but also come with a higher level of risk. Savings bonds, on the other hand, are issued by the government and are considered to be safer investments. The higher return could be due to the higher yield on the corporate bond.
2. One of the bonds was sold at face value while the other was sold below face value: If one of the bonds was sold at a price below its face value (also known as a discount), the investor would have paid less for the bond initially. As a result, when the bond reaches maturity, the investor will receive the full face value, resulting in a higher return.
3. One of the bonds earned greater interest payments than the other: Bonds typically pay interest at regular intervals, such as annually or semi-annually. If one of the bonds earned higher interest payments than the other, it would result in a greater total return for the investor. This could be due to differences in the coupon rates or interest rates of the bonds.
4. One of the bonds was a municipal bond while the other was a savings bond: Municipal bonds and savings bonds are different types of bonds issued by different entities. Municipal bonds are issued by local governments and are often exempt from federal income tax, making them attractive to investors seeking tax advantages. Savings bonds, as mentioned earlier, are issued by the government and provide a fixed rate of return. The difference in return could be due to the tax advantages of the municipal bond.
In summary, any of the above factors could explain the difference in return between the two bonds. To determine which factor specifically caused the difference, more information about the bonds and their terms would be needed.