A portfolio manager is considering buying two bonds. Bond A matures in three years and has a

Question:

A manager is considering buying two bonds. Bond A matures in three years and has a rate of 10% payable semiannually. Bond B, of the same credit quality, matures in 10 years and has a rate of 12% payable semiannually. Both bonds are priced at par.
(a) Suppose that the manager plans to hold the bond that is purchased for three years. Which would be the best bond for the manager to purchase?
(b) Suppose that the manager plans to hold the bond that is purchased for six years instead of three years. In this case, which would be the best bond for the manager to purchase?
(c) Suppose that the manager is managing the assets of a life insurance company that has issued a five-year guaranteed investment contract (GIC). The interest rate that the life insurance company has agreed to pay is 9% on a semiannual basis. Which of the two bonds should the manager purchase to ensure that the GIC payments will be satisfied and that a profit will be generated by the life insurance company? Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...