Question
Suppose you are an investment advisor helping a client decide between two bond options. She has told you she wants the best return possible,but she
Suppose you are an investment advisor helping a client decide between two bond options. She has told you she wants the best return possible,but she wants to minimize her risk in case she has to sell the bond prior to maturity. Her options are Bond 1, which matures in exactly 5 years and has anannual coupon rate of 3% and face value of $1,000, and Bond 2, which matures inexactly 5 years, and has an annual coupon rate of 12% and face value of $1,000.Assume these bonds are otherwise identical and both are priced in the market according to the current market interest rate of 7.5%.
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