Jens Martel has a choice of two 5-year bonds and is seeking thehighest return. Given...

Jens Martel has a choice of two 5-year bonds and is seeking the highest return. Given the following information about each bond, which one should he choose? Bond A's coupon is 6.40% and is priced at 99.90 per 100 Bond B's coupon is 6.05% and is priced at 98.17 per 100

Bond A

Bond B

Both are same

Solutions

Expert Solution

Bond A

FV = 100

PMT = 100 * 0.064 = 6.04

PV = -99.90

N = 5

CPT I/Y

I/Y = 6.4240%

The return on Bond A is 6.4240%

Bond B

FV = 100

PMT = 100 * 0.0605 = 6.05

PV = -98.17

N = 5

CPT I/Y

I/Y = 6.4902%

The return on Bond B is 6.4902%

The return on Bond B is greater than the return on Bond A.

So, Jens Martel should choose Bond B

jeff jeffy answered 2 years ago

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