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Bonds and Financial Assets Quick Check
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Question
Two investors are each issued one bond with the same face value, maturity date, and yield. After both bonds have reached maturity, it is discovered that one of the bondholders received a greater total return on her investment. If all expected payments were received, which of the following could explain the difference in return?(1 point)
Responses

One of the bonds was a corporate bond while the other was a savings bond.
One of the bonds was a corporate bond while the other was a savings bond.

One of the bonds earned greater interest payments than the other.
One of the bonds earned greater interest payments than the other.

One of the bonds was sold at face value while the other was sold below face value.
One of the bonds was sold at face value while the other was sold below face value.

One of the bonds was a municipal bond while the other was a savings bond.

1 answer

To determine why one bondholder received a greater total return despite both bonds having the same face value, maturity date, and yield, we need to analyze the options given:

  1. One of the bonds was a corporate bond while the other was a savings bond.

    • This option does not inherently indicate a difference in total return if both paid the expected payments.

  2. One of the bonds earned greater interest payments than the other.

    • This could explain a difference in returns, as higher interest payments would lead to a higher total return, but it contradicts the condition that they had the same yield.

  3. One of the bonds was sold at face value while the other was sold below face value.

    • If one bond was sold below face value (at a discount), it would yield a greater total return when considering the total proceeds received at maturity, assuming the same yield.

  4. One of the bonds was a municipal bond while the other was a savings bond.

    • Similar to the first option, this does not automatically lead to a difference in total return unless tax implications were considered, but that’s not a direct comparison based on the information provided.

The most suitable explanation given the scenario described is:

One of the bonds was sold at face value while the other was sold below face value.

This option would account for the possibility of the total returns differing, assuming that the interest payments were expected to be the same due to the stated yield at the time of issuance.