You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio. It appears that the economic cycle is beginning to mature, inflation is expected to accelerate, and in an effort to contain the economic expansion, central bank policy is moving toward constraint. For each of the situations below, state which one of the two bonds you would prefer.

Briefly justify your answer in each case.

a. Government of Canada (Canadian pay) 4% due in 2017 and priced at 98.75 to yield 4.50% to maturity.

or

Government of Canada (Canadian pay) 4% due in 2027 and priced at 91.75 to yield 5.19% to maturity.

b. Texas Power and Light Co. 51/2 due in 2022, rated AAA, and priced at 90 to yield 7.02% to maturity.

or

Arizona Public Service Co. 5.45 due in 2022, rated A-, and priced at 85 to yield 8.05% to maturity.

c. Commonwealth Edison 23/4 due in 2021, rated Baa, and priced at 81 to yield 7.2% to maturity.

or

Commonwealth Edison 93/8 due in 2021, rated Baa, and priced at 114.40 to yield 7.2% to maturity.

d. Shell Oil Co. 61/2 sinking fund debentures due in 2027, rated AAA (sinking fund begins September 2013 at par), and priced at 89 to yield 7.1% to maturity.

or

Warner-Lambert 67/8 sinking fund debentures due in 2027, rated AAA (sinking fund begins April 2020 at par), and priced at 89 to yield 7.1% to maturity.

e. Bank of Montreal (Canadian pay) 5% certificates of deposit due in 2015, rated AAA, and priced at 100 to yield 5% to maturity.

or

Bank of Montreal (Canadian pay) floating-rate note due in 2017, rated AAA. Coupon currently set at 3.7% and priced at 100 (coupon adjusted semiannually to .5% above the 3-month Government of Canada Treasury bill rate).