Consider this investment. Agus have money $10,000 right now, and 2 options to select / buy either one of the following :

a. Zero Coupon Bond (ZCB) with C = $1,000 and 3 years expired date.

b. Minimum Guarantee Coupon Bond (MGCB) with floating rate (coupon rate follows the market yield rate but has minimum rate). This bond has features F = $1,000-par value, C = $1,000 redemption value, 3 years maturity bond, minimum coupon rate = 8% annual coupons. Note that you will receive a minimum 8% of coupon rate whatever the fluctuation of market yield rate. It means that if the market yield rate dropped below 8%, then you will receive 8% of coupon rate as the consequence of guarantee coupon rate, but if the market yield rate rise above 8%, then you will receive the market yield rate as coupon rate as the benefit of this bond. Agus predicts the movement market yield rate during the first year is = %, the second year is = %, the third year is = %. Determine which option would I buy to cover/guarantee the downside risk from the movement market yield rate.

SHOW YOUR WORK

Please answer correctly

Hint : Calculate the price of these bonds, called by ZCB_price & MGCB_price, then calculate ZCB_value & MGCB_value as $10,000/ZCB_price & $10,000/MGCB_price respectively. Finally, calculate the future value at 3rd year of each bond as FV3_ZCB = ZCB_price * accumulation value of the yield rate * ZCB_value and FV3_MGCB = MGCB_price * accumulation value of the yield rate * MGCB_value. Compare those value and draw your conclusion.