Question
You have the following information on two bonds A and B: Bond Coupon Payment Price A 6% Annual 100.537% of par value B 5% Annual
You have the following information on two bonds A and B: Bond Coupon Payment Price A 6% Annual 100.537% of par value B 5% Annual 101.886% of par value a) Compute the yield to maturity of each bond. (6 marks) b) If you are a treasurer, and consider the default risk of both bonds to be the same, which one would you purchase? Assume you have one-year holding period. (2 marks) c) Considering interest rate risk, would your answer remain the same as b) above? Provide your reasoning. Assume that you dont have a good forecast regarding future interest rates. (4 marks) d) Which bond would you buy if you expected interest rates to go down? Why? (3 marks)
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