Which maturity bond would be better for this investor, the 10 or 15-year? What would be the dollar gain per bond with the expected immediate YTM change in each case?
XYZ Inc. is a company that is considering issuing bonds to finance the expansion
of its activities. The managers thought about bonds with 10 or 15 years to maturity, with a
coupon rate of 6%, paid semiannually. The face value of those bonds would be $1,000 and they
would expect those bonds to pay just as much as investors require, being sold at par at the
issuance date. Suppose that an investor is interested in the company’s bonds, and they expect
that the interest rates (YTM) are going to change immediately, decreasing by 2 percentage
points compared to the YTM at issue. Which maturity bond would be better for this investor,
the 10 or 15-year? What would be the dollar gain per bond with the expected immediate YTM
change in each case?
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