Answer: Bond X

## 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. ### Rating Analysis: - **Bond X**: AA+ (qualifies - meets AA or better requirement) - **Bond Y**: A+ (does NOT qualify - below AA rating) - **Bond Z**: AAA (qualifies - meets AA or better requirement) ### YTM Analysis: Using the bond pricing formula for semi-annual payments: \[ P = \frac{F}{100} \left[ \frac{c}{2} \sum_{i=1}^{2T} \left( \frac{1}{1 + y/2} \right)^i + \frac{100}{(1 + y/2)^{2T}} \right] \] Where: - P = Bond price - y = YTM - c = Coupon rate - T = Term to maturity in years - F = Face value of the bond **Calculated YTMs:** - **Bond X**: 4.06% - **Bond Y**: 4.16% (but disqualified due to rating) - **Bond Z**: 3.62% **Why Bond X has higher YTM than Bond Z:** - Bond X pays a higher coupon (3.50% vs 3.38%) - Bond X is cheaper (975 vs 989) - Both bonds have the same maturity (5 years) **Calculator inputs for verification:** - **Bond X**: N = 10; FV = 1,000; PMT = 17.5; PV = -975; y = 2.0287% × 2 = 4.0575% - **Bond Z**: N = 10; FV = 1,000; PMT = 16.9; PV = -989; y = 1.8113% × 2 = 3.6225% Among the qualifying bonds (X and Z), Bond X has the highest YTM at 4.06%.

Author: LeetQuiz .