How we choose Bond x ?

An investment advisor is advising a wealthy client. The client would like to invest USD 500,000 in a bond rated at least AA. The advisor is considering bonds issued by Company X, Company Y, and Company z, and wants to choose a bond that satisfies the client's rating requirement, but also has the highest yield to maturity. The advisor has gathered the following information: Assuming semi-annual coupon payments, which bond should the investment advisor purchase for the client? A. Bond X B. Bond Y C. Bond Z D. Either Bond X or Bond Z Correct Answer: A Explanation: A is correct. To reach the correct answer, find the bond with the highest yield to maturity (YTM) that qualifies for inclusion in the client's portfolio. Although we can calculate the YTM for each bond using a business/financial calculator, it is unnecessary to do so in this case. Of the three bonds, Bond Y does not qualify for the portfolio as its rating of A+ is below the AA rating required by the client. This leaves Bond X and B ond Z only. Comparing the two bonds, Bond X pays a higher coupon than Bond Z, yet it is cheaper as well. Therefore, the YTM on Bond X is higher. To formally calculate the YTM, you could also use the following equation describing the relationship between price and YTM : P=100F[2ci=12T(1+y/21)i+(1+y/2)2T100] where: P=B ond price y=rTM co. Coupon rate T= Term to maturity in years F= Face value of the bond Using this equation (or an equivalent calculator function), the YTM for the X bond equals 4.06%, while the YTM for the 2 bond equals 3.62%. Using a business/financial calculator for: BondX;N=25=10;FV=1,000;PMT=(0.0350/2)1,000=17.5;PV=975;Y=2,02872=4.0575% BondY:N=25=10;FV=1,000;PMT=(0.0356/2)1,000=17.8;PV=973;y=2.08192=4.1637% Bond Z : N=25=10;FV=1,000;PMT=(0.0338/2)1,000=16.9;PV=989;y=1.81132= 3.6225% B,C, and D are incorrect per the explanation for A above