You have $25 million to invest in only one of two bonds in the market labelled Bond A and Bond B:

BOND A: Zero coupon, market yield 6%, maturity 8 years

BOND B: Coupon rate 6%, market yield 6%, maturity 10 years.

Assume you have an investment horizon of one year. Your expectation is that in exactly one year, the market yields on both bands will decline from 6% to 3% and you plan on selling the bond at that time. You wish to invest in only one of the two bonds.

a. How much are you willing to pay for each bond?

b.  Which bond would you invest in given your investment horizon and your expectations about the yields on the bonds? Assume your marginal tax rate is 36%. 

Answer rating: 100% (QA)

a Bond A Zero coupon bond Market yield 6 Time to maturity 8 years Assuming Par value of 1000 Price o... View the full answer