Consider a Bond Portfolio Manager Who Expects Interest Rates to Decline

question 28

Multiple Choice

Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two bonds. Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity
Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity

• A) Bond A because it has a higher coupon rate
• B) Bond A because it has a higher yield to maturity
• C) Bond B because it has a lower coupon rate
• D) Bond A or Bond B because the maturities are the same
• E) None of these are correct.

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Definitions:

Interest Calculations

The process of determining the amount of interest earned or paid on investments, loans, or savings over a period of time.

Bonds Purchased

Bonds purchased refer to the acquisition of bond securities by an investor, representing loans to the issuer in return for periodic interest payments and the return of principal at maturity.

Accrued Interest

Interest that has been incurred but not yet paid, representing a liability for the borrower and an asset for the lender.

Semiannual Interest Payments

Interest payments made twice a year on a loan or bond.