Question
In this question, all bonds under consideration have principal (face) value $1, 000. You face an opportunity to purchase a portfolio of bonds: 100 A
In this question, all bonds under consideration have principal (face) value $1, 000. You face an opportunity to purchase a portfolio of bonds: 100 A bonds with two year maturity and coupon rate 10% and 200 B bonds with four year maturity and coupon rate 7% . The yield to maturity on A is 25%, the yield to maturity on B is 15%. (a) Based on the information provided, which of the two bonds, A or B, is considered riskier by investors? (b) What are the cashflows generated by the portfolio in years 1 to 4? (c) What is the cost of the entire portfolio (100 A bonds plus 200 B bonds)? Give formula(. (d) What is the yield to maturity on the entire portfolio? Give equation where it is the only unknown (e) The price of which bond, A or B, would you expect to be more responsive to changes in discount factor? Explain briefly
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