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Answer: Bond X
A is correct. To reach the correct answer, find the bond with the highest yield to maturity (YTM) that qualifies for inclusion in the client's portfolio. Although we can calculate the YTM for each bond using a business/financial calculator, it is unnecessary to do so in this case. Of the three bonds, Bond Y does not qualify for the portfolio as its rating of A+ is below the AA rating required by the client. This leaves Bond X and Bond Z only. Comparing the two bonds, Bond X pays a higher coupon than Bond Z, yet it is cheaper as well. Therefore, the YTM on Bond X is higher.
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A financial consultant is offering advice to a high-net-worth client who intends to invest USD 500,000 in a bond rated at least AA. The consultant is assessing bonds from Company X, Company Y, and Company Z to determine the bond that satisfies the client's credit rating requirement and provides the maximum return at maturity.
The following data has been collected by the consultant:
| Company/Bond | Bond rating | Annual coupon rate (%) | Time to maturity in years | Price (USD) | Par value (USD) |
|---|---|---|---|---|---|
| X | AA+ | 3.50 | 5 | 975 | 1,000 |
| Y | A+ | 3.56 | 5 | 973 | 1,000 |
| Z | AAA | 3.38 | 5 | 989 | 1,000 |
Considering that the bonds make semi-annual coupon payments, which bond should the financial consultant choose for the client?
A
Bond X
B
Bond Y
C
Bond Z
D
Either Bond X or Bond Z
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