Question: Assume an investor is trying to choose between purchasing a

Assume an investor is trying to choose between purchasing a deep discount bond or a par value bond. The deep discount bond pays 6 percent interest, has 20 years to maturity, and is currently trading at $656.80 with a 10 percent yield to maturity. It is callable at $1,050.
The second bond is selling at its par value of $1,000. It pays 12 percent interest and has 20 years to maturity. Its yield to maturity is also 12 percent. The bond is callable at $1,080.
a. If the yield to maturity on the deep discount bond goes down by 2 percent to 8 percent, what will the new price of the bond be? Do semiannual analysis.
b. If the yield to maturity on the par value bond goes down by 2 percent to 10 percent, what will the new price of the bond be? Do semiannual analysis.
c. Based on the facts in the problem and your answers to parts a and which bond appears to be the better purchase? (Consider the call feature as well as capital appreciation.)

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  • CreatedSeptember 21, 2015
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