Question

If you expect yields to rise, which bond should you choose?

Bond	Coupon Rate	YTM	Callable?	Time to maturity
A	5%	5%	NO	2 years
B	5.15%	5.15%	YES	2 years

A

B

A=B

AND WHY?

Answer 1

BOND B will be selected because it is offering with higher Bond coupon rate and even if it is callable, it will not be called because the interest rates in the economy is expected to rise and it will mean that the the company is not going to exercise the call option at the times when the interest rates are rising, and it will rather exercise the call option when the interest rates are falling so I will be preferrring BOND B because it is offering with higher yield and higher coupon rate and the expectation in the interest rates in the economy is also on the upside.

Hence, I will select with BOND B.