Explanation:
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.
Using the bond pricing formula for semi-annual payments:
Where:
Calculated YTMs:
Why Bond X has higher YTM than Bond Z:
Calculator inputs for verification:
Among the qualifying bonds (X and Z), Bond X has the highest YTM at 4.06%.
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An investment advisor is advising a wealthy client. The client would like to invest USD 500,000 in a bond rated at least AA. The advisor is considering bonds issued by Company X, Company Y, and Company Z, and wants to choose a bond that satisfies the client's rating requirement, but also has the highest yield to maturity. The advisor has gathered the following information:
| Company/Bond | X | Y | Z |
|---|---|---|---|
| Bond rating | AA+ | A+ | AAA |
| Annual coupon rate (%) | 3.50 | 3.56 | 3.38 |
| Time to maturity in years | 5 | 5 | 5 |
| Price (USD) | 975 | 973 | 989 |
| Par value (USD) | 1,000 | 1,000 | 1,000 |
Assuming semi-annual coupon payments, which bond should the investment advisor purchase for the client?
A
Bond X
B
Bond Y
C
Bond Z
D
Either Bond X or Bond Z
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