Question

Which investment should I choose?

Bond A: BBB Corporate bond, Price=$1,100, Par=$1,000, Coupon rate=4% (semiannual coupons), 13 years to maturity Bond B: BBB Corporate bond, Price=$5,900, Par=$5,000, Coupon rate=4.8% (semiannual coupons), 13 years to maturity

I. Bond A

J. Bond B

K. They are equivalent, so both are the same

L. Not enough info.

Answer 1

We need to calculate YTM of the 2 bonds as below;

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26
Price	1100
Coupon payment		40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40
Par value																											1000
Total cashflows	-1100	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	1040
IRR	6.827%
YTM =2*IRR	13.655%

Q2:

Bond (Annual payment)
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26
Price	5900
Coupon payment		240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240
Par value																											5000
Total cashflows	-5900	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	240	5240
IRR	7.418%
YTM =2*IRR	14.837%

YTM is higher for investment bond B; Also all the other parameters for the two bonds are same; Hence choose Bond B which has the higher YTM