You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio.

It appears that the economic cycle is beginning to mature, inflation is expected to accelerate, and in an effort to contain the economic expansion, the central bank is moving toward tighter monetary policy. For each of the situations below, state which one of the two bonds you would prefer. Briefly justify your answer in each case.

a. Government of Canada (Canadian pay) 3% coupon due in 2025 and priced at 98.75 to yield 3.50% to maturity.

or Government of Canada (Canadian pay) 3% coupon due in 2037 and priced at 95.75 to yield 3,15% to maturity.

b. Texas Power and Light Co. 4.50% coupon due in 2028, rated AAA, and priced at 95 to yield 5.02% to maturity.
or Arizona Public Service Co. 4.55% coupon due in 2028, rated A–, and priced at 92 to yield 5.85% to maturity.

c. Commonwealth Edison 2.75% due in 2027, rated Baa, and priced at 91 to yield 6.2% to maturity.
or Commonwealth Edison 7.375% due in 2027, rated Baa, and priced at 114.40 to yield 6.2% to maturity.

d. Bank of Montreal (Canadian pay) 3% certificates of deposit due in 2025, rated AAA, and priced at 100 to yield 3% to maturity.
or Bank of Montreal (Canadian pay) floating-rate note due in 2028, rated AAA. Coupon adjusts semiannually to .5% above the 3-month Government of Canada Treasury-bill rate). P-963