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Question 2 A Company plans to purchase either (1)zero-coupon bonds that have  12 years to maturity, a...

Question 2

A Company plans to purchase either (1)zero-coupon bonds that have  12 years to maturity, a par value of $50 million, and a purchase price of  $20 million or (2) bonds with similar default risk that have six years to maturity, a 9 percent coupon rate, a par value of $20 million, and a purchase price of $20 million. The company can invest $20 million for six years. Assume that the market’s required return in five years is forecasted to be 10 percent. Which alternative would offer the company a higher expected return (or yield) over the six-year investment horizon?

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Answer #1

Hence Second Bond has higher rate of return, hence investor should invest in that.

Formulas Used:-

Value of Bond after 6 year=PV(B4,B3,0,-B1)

Rate of return (Zero-Bond)=RATE(B3,0,B5,-B6)

Rate of return(Coupon-Bond)=RATE(B10,-B9*B11,B12,-B9)

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