An institutional dealer is offering two Government of Canada strip bonds, both with a par value of $1,000 and an identical annual yield to maturity of 4.00%. Bond A matures in 10 years and Bond B matures in 20 years. Which of the following is true regarding their market prices?

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Accepted Answer

Because of the compounding effect in the denominator (1+r)^t, increasing 't' significantly reduces the present value (price) even if the yield (r) remains constant.

An institutional dealer is offering two Government of Canada strip bonds, both with a par value of $1,000 and an identical annual yield to maturity of 4.00%. Bond A matures in 10 years and Bond B matures in 20 years. Which of the following is true regarding their market prices?

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