You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
A. The price of Bond B will decrease over time, but the price of Bond A will increase over time.
B. The prices of both bonds will remain unchanged.
C. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
D. The prices of both bonds will increase by 7% per year.
E. The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.
Answer: C
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On January 1, Year 1 a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607, the first of which is due on 104 Copyright ©2018 McGraw-Hill December 31, Year 1.
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