Aug 17, 2017

BOND YIELDS (USE THE CHAPTER APPENDIX TO ANSWER THIS PROBLEM)

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Bond Yields (Use the chapter appendix to answer this problem.) Hankla Company plans to purchase either (1) zero-coupon bonds that have 10 years to maturity, a par value of $100 million, and a purchase price of $40 million; or (2) bonds with similar default risk that have five years to maturity, a 9 percent coupon rate, a par value of $40 million, and a purchase price of $40 million.

Hankla can invest $40 million for five years. Assume that the market’s required return in five years is forecasted to be 11 percent. Which alternative would offer Hankla a higher expected return (or yield) over the five-year investment horizon?


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