Question based on bonds and their valuation

Reference no: EM1314460

Aaron Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true?

a. Both bonds must sell for the same price if markets are in equilibrium.

b. The zero coupon bond must have a higher price because of its greater capital gain potential.

c. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.

d. All rational investors will prefer the 8% bond because it pays more interest.

Reference no: EM1314460

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