Question

Which security should sell at a greater price?

a. A 10-year Treasury bond with a 9% coupon rate or a 10-year T-bond with a 10% coupon.

b. A three-month expiration call option with an exercise price of \(40 or a three-month call on the same stock with an exercise price of \)35.

c. A put option on a stock selling at \(50 or a put option on another stock selling at \)60.

(All other relevant features of the stocks and options are assumed to be identical.)

Short answer

a. Greater price

b. Greater price

c. Greater price

Step-by-step solution

Definition

A long term debt backed by government is also called the Treasury bonds or T-bonds.

Solution for ‘a’

a. The higher coupon bond i.e. T-bond with 10% coupon should sell at a greater price.

Solution for ‘b’

b. The call with the lower exercise price i.e. $35 should sell at a greater price

Solution for ‘c’

c. The put on the lower priced stock i.e. $50 should sell at a greater price