Question

28. A client of yours, George, wants to maximize his return on an intermediate-term bond that he plans to hold until maturity. You have gathered information on the following 2 bonds, both of which have a $1,000 par value. Bond 1: A rated; coupon rate of 6%; matures in 6 years and pays interest semiannually, currently selling for $850, duration is 5.16 years. Bond 2: A rated; coupon rate of 10%; matures in 8 years and pays interest semiannually; currently selling for $1,100; duration is 7.15 years. Which of these bonds would you recommend to George and why? 1. Bond 1, because it is less susceptible to price fluctuations due to interest rate changes 2. Bond 1, because it has a higher yield to maturity than Bond 2 3. Bond 2, because its higher coupon rate gives it a superior total return to Bond 1 4. Bond 2, because it has a higher duration than Bond 1 A. 1 only B. 2 only C. 3 only D. 3 and 4

Answer 1

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