Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 7.5%,but she expects them to fall to 5.5% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 6.0% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile?
Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 7.5%,but she expects them to fall to 5.5% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 6.0% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile?
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter6: Risk And Return
Section: Chapter Questions
Problem 5MC: Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as...
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Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 7.5%,but she expects them to fall to 5.5% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 6.0% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile?
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