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Hi! Please answer all questions correctly and I will make sure to give like. Thank you QUESTION 2 (24 marks) (a) Jack is analyzing the
Hi! Please answer all questions correctly and I will make sure to give like. Thank you
QUESTION 2 (24 marks) (a) Jack is analyzing the following two bonds with the same risk for investment: Bond A: A 20-year $1,000-par 6% quarterly coupon bond issued by Company A Bond B: A 30-year zero coupon bond issued by Company B (i) Determine the market price of Bond A given its current YTM (APR) is 8%. (4 marks) (ii) Suppose Bond A's YTM (APR) drops by 2% one year later. 1) Compute the current yield and capital gains yield of Jack's investment in Bond A. (6 marks) 2) Compute the 1-year total yield of Jack's investment in Bond A assuming the YTM remains unchanged (at 6% APR) until t=4 (quarters). (5 marks) (iii) If Jack expects the interest rate to drop in the coming year, which bond (Bond A or Bond B) should Jack choose? Explain. (2 marks)
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