Hello, I need help with this problem: Electrical utility is offering a security,

Question

Hello, I need help with this problem:

Electrical utility is offering a security, known as zero-coupon bond, for sale. The terms of the security are investors pay $2,337.57 today to purchase the security, and the utility will pay the owner of the security $10,000 in ten years time. The government is offering a similar security; except that this Security will pay $500 each year for the duration of the security and in the last year will pay the full $10,000 plus the $500. The government is selling this security, known as a coupon bond, for $4, 787.76.

Which one would you prefer? Hint: Calculate the rate of return

Explanation / Answer

for zero coupon bond

2337.57 = 10000/(1+r)^10

r = 15.64%

for coupon bond

4787.76 = 500 * PVIFA(r%,10) + 10000 * PVIF(r%,10)

r = 15.64%

the rate of retun for both the bonds is same ,

so it doesnt matter which one you choose

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