Question
You are considering investing $1 million in one of the two following bonds. The first bond is an Australian Commonwealth Government Security (CGS) that has
You are considering investing $1 million in one of the two following bonds. The first bond is an Australian Commonwealth Government Security (CGS) that has a maturity date of 15 July 2024. The CGS pays coupons semi-annually on the 15th of the relevant coupon payment month. The CGS has a coupon rate of 8% per annum and is priced at a yield to maturity of 5% per annum. The second bond is a zero coupon bond that has a yield to maturity of 5% per annum and matures on 17 June 2024. The settlement date of the trade will be 17 June 2022. You expect all interest rates to increase by the same amount shortly after you purchase the bond. Which one of these bonds would you purchase? Why?
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