A 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 2-year $1,000 annuity is...
A 2-year $1,000 par zero-coupon bond is currently priced at $819.00. A 2-year $1,000 annuity is currently priced at $1,712.52. If you want to invest $10,000 in one of the two securities, which is a better buy? You can assume
a. the pure expectations theory of interest rates holds,
b. neither bond has any default risk, maturity premium, or liquidity premium, and
c. you can purchase partial bonds.
| A. |
none of the choices |
|
| B. |
2-year annuity |
|
| C. |
they are equally good |
|
| D. |
2-year zero-coupon bond |
Homework Answers
Interest Rate provided by first bond is 10.5%. Calculation is given below:
And the interest provided by second bond is 11% as per calculation given below:
Hence, 2 year annuity is a better choice
Option B is correct.
Add Answer to:
A 2-year $1,000 par zero-coupon bond is currently priced at
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