Two investors are considering the purchase of Corporation XYZ bonds. The bonds a
ID: 2641025 • Letter: T
Question
Two investors are considering the purchase of Corporation XYZ bonds. The bonds are selling at a price of $1,100 each. Investor A decides to buy the bonds and Investor B does not buy the bonds.
Investor A must have a required return lower than the required return for Investor B.
The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
The yield to maturity for Investor A must be less than the yield to maturity for Investor B.
The yield to maturity for this bond must be higher than the coupon rate.
a.Investor A must have a required return lower than the required return for Investor B.
b.The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
c.The yield to maturity for Investor A must be less than the yield to maturity for Investor B.
d.The yield to maturity for this bond must be higher than the coupon rate.
Explanation / Answer
The correct option must be A = Investor A must have a required return lower than the required return for Investor B.
Reason: As investor A has a lower required rate of return than the required return for investor B, investor A places higher utility on the bond and hence purchases it. Investor B estimates that the expected return on the bond will be less than the opportunity cost of his investment of $1,100 so he decides not to buy the bond.
I hope my solution solves your query.
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