Question

A 30 year bond pays 3% interest rate, and a 15 year bond pays 2% interest rate. Your uncle who is 50 years old now, wants to purchase a 30 year government bond now as it is considered a safe investment. He plans to sell it when he becomes 65 years old. What is your advise for him?

Answer 1

It is advisable for him to purchase the 30 years government bond because we need to look 2 things:
1. Coupon amount.
2. Price received by selling the bond at the age of 65.

As coupon rate is higher in case of 30 years bonds, it will receive a higher coupon amount.

As far as the price is concerned:

In the case of 15 years bond, we receive the face value of $1000,

The 15 years rate is 2%, so 15 years YTM is 2%.

The 30 years bonds price after 15 years calculation is as below:
as both price and coupon amount is higher in case of 30 years bond- it is advisable.