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)

Question

Responses

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

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

Answer 1

The statement that could explain the difference in return is:

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

Here’s why this is the best explanation:

• If both bonds have the same face value, maturity date, and yield, then the fundamental payments should be the same if held to maturity. However, if one bond was purchased at a discount (below face value), the total return on that bond would be higher because the bondholder would realize a capital gain in addition to the interest payments received.

The other options provided do not sufficiently explain the difference in returns in the same context because:

• Interest payments being greater would imply differing yields, which contradicts the premise that they have the same yield.
• The difference in bond types (municipal vs. savings bond or corporate vs. savings bond) doesn't inherently affect returns unless additional tax implications or risks are specified.