An investor can choose between two investment opportunities. Option 1: pay £70 to purchase a bond that that is redeemable at par in 15 years, it has £100 face value and it pays semi-annual coupons at a (nominal) rate of 3% per annum. Option 2: purchase a Zero-Coupon Bond with £100 face value and maturity in 15 years, that produces a yield of 2% p.a. effective. (a) The investor wants to buy the cheapest product. Which one is it? (b) The investor chooses the option that gives the highest yield. Which one is it?
An investor can choose between two investment opportunities. Option 1: pay £70 to purchase a bond that that is redeemable at par in 15 years, it has £100 face value and it pays semi-annual coupons at a (nominal) rate of 3% per annum. Option 2: purchase a Zero-Coupon Bond with £100 face value and maturity in 15 years, that produces a yield of 2% p.a. effective. (a) The investor wants to buy the cheapest product. Which one is it? (b) The investor chooses the option that gives the highest yield. Which one is it?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:6. An investor can choose between two investment opportunities. Option 1: pay £70 to purchase a bond
that that is redeemable at par in 15 years, it has £100 face value and it pays semi-annual coupons at a
(nominal) rate of 3% per annum. Option 2: purchase a Zero-Coupon Bond with £100 face value and
maturity in 15 years, that produces a yield of 2% p.a. effective.
(a) The investor wants to buy the cheapest product. Which one is it?
(b) The investor chooses the option that gives the highest yield. Which one is it?
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