Given the opportunity to invest in one of the three bonds listed below, which would you purchase? Assume an interest rate of 7%.

Bond Face Value Coupon Rate Maturity Price
A $1,000 4% 1 year $990
B $1,000 7.5% 17 years $990
            C $1,000 8.5% 15 years $990

 

Intrinsic prices of bond will be calculated and then compared as;

Bond A = $971.96;    Bond B = $1,048.81; and       Bond C = $1,136.62

On the basis of these intrinsic values, I think Bond c is the best option among all and it must also be priced at $1,136 to be sold for $990.

Based on these prices, YTM will be calculated as;

Bond A = 5.05%;        Bond B = 7.6%; and               Bond C = 8.62%.

In the case of YTM, again Bond C has the highest Yield to Maturity and if the Bond B and C would be selling at premiums because coupon rate is higher than the market rate.

So, I think Bond C is the best option for investor to buy and it is better than both Bond A and B having coupon rate but over a short period of time.