Assume that you are an aggressive bond trader and therefore, want to speculate on interest rate swing. Market interest rates are currently 9 percent,…
BBS Fundamentals of Investment · 2080 · Solved Question with Answer
Assume that you are an aggressive bond trader and therefore, want to speculate on interest rate swing. Market interest rates are currently 9 percent, but you expect the interest rates to fall to 7 percent within a year. You are thinking of buying either a 25-year, zero coupon bond or a 20-year, 5.5 percent bond. Both bonds have Rs. 1000 par values and carry same agency rating.
a. If you want to maximize capital gain income, which of the two bonds should you select? Show your calculation.
b. If you want to maximize total return from your investment, which of the two bonds should you select?
c. Why did one bond provide better capital gains than the other?