Question 2

A Company plans to purchase either (1)zero-coupon bonds that have 12 years to maturity, a par value of $50 million, and a purchase price of $20 million or (2) bonds with similar default risk that have six years to maturity, a 9 percent coupon rate, a par value of $20 million, and a purchase price of $20 million. The company can invest $20 million for six years. Assume that the markets required return in five years is forecasted to be 10 percent. Which alternative would offer the company a higher expected return (or yield) over the six-year investment horizon?