Question

You are considering the purchase of two $1,000 bonds. Your expectation is that interest rates will drop, and you want to buy the bond that provides the maximum capital gains potential. The first bond has a coupon rate of 6 percent with four years to maturity, while the second has a coupon rate of 14 percent and comes due six years from now. The market rate of interest (discount rate) is 8 percent. Which bond has the best price movement potential? Use duration to answer the question.


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  • CreatedSeptember 21, 2015
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