Question

A portfolio manager is considering buying two bonds. Bond A matures in three years and has a coupon rate of 10% payable semiannually. Bond B, of the same credit quality, matures in 10 years and has a coupon rate of 12% payable semiannually. Both bonds are priced at par.
(a) Suppose that the portfolio manager plans to hold the bond that is purchased for three years. Which would be the best bond for the portfolio manager to purchase?
(b) Suppose that the portfolio manager plans to hold the bond that is purchased for six years instead of three years. In this case, which would be the best bond for the portfolio manager to purchase?
(c) Suppose that the portfolio manager is managing the assets of a life insurance company that has issued a five-year guaranteed investment contract (GIC). The interest rate that the life insurance company has agreed to pay is 9% on a semiannual basis. Which of the two bonds should the portfolio manager purchase to ensure that the GIC payments will be satisfied and that a profit will be generated by the life insurance company?


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  • CreatedAugust 22, 2015
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