Answer: 4.06%

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 cigon than Bond Z, yet it is cheaper as well. Therefore, the YM on Bond X is To formally calculate the YM, you could also use the following equation describing the relationship between price and YTM: P = \frac{F}{100} \left[ \sum_{t=1}^{2T} \frac{C}{(1 + y/2)^t} + \frac{100}{(1 + y/2)^{2T}} \right] where: P = Bond price y = YTM c = Coupon rate T = Term to maturity in years F = Face value of the bond Using this equation (or an equivalent calculator function), the YTM for Bond X equals 4.06%, while the YTM for Bond Z equals 3.62%. Using a business/financial calculator for: Bond X: N = 2*5 = 10; FV = 1,000; PMT = (0.0350/2)*1,000 = 17.5; PV = -975; y = 2.0287*2 = 4.0575% Bond Y: N = 2*5 = 10; FV = 1,000; PMT = (0.0356/2)*1,000 = 17.8; PV = -973; y = 2.0819*2 = 4.1637% Bond Z: N = 2*5=10; FV=1,000; PMT=(0.0338/2)*1,000=16.9; PV=-989; y = 1.8113*2 = 3.6225% B, C, and D are incorrect per the explanation for A above.

Author: LeetQuiz Editorial Team