Q.14I

Expert-verifiedFound in: Page 361

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**Long-term Treasury bonds currently sell at yields to maturity of nearly 8%. You expect interest rates to fall. The rest of the market thinks that they will remain unchanged over the coming year. **

**Choose the bond that will provide the higher capital gain in each question if you are correct. Briefly explain your answer.**

**a. (1) A Baa-rated bond with a coupon rate of 8% and a time to maturity of 20 years.**

** (2) An Aaa-rated bond with a coupon rate of 8% and a time to maturity of 20 years.**

**b. (1) An A-rated bond with a coupon rate of 4% and maturity of 20 years, callable at **

** 105.**

** (2) An A-rated bond with a coupon rate of 8% and maturity of 20 years, callable at **

** 105.**

**c. (1) A 6% coupon noncallable T-bond with a maturity of 20 years and YTM 5 8%.**

** (2) A 9% coupon noncallable T-bond with a maturity of 20 years and YTM 5 8%.**

**Answer**

a. Aaa-rated bond

b. Longer coupon bond

c. Lower coupon bond

The correct choice would be Aaa rated bond from option b as it has lower YTM hence the longer duration.

The correct choice would be a lower coupon bond as it has a longer duration and more call protection.

The correct choice would be a lower coupon bond as it has a longer duration.

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