question archive You are given information on two bonds
You are given information on two bonds
Subject:FinancePrice:2.89 Bought5
You are given information on two bonds. Bond WIRA is currently callable with a call price of $1080 while Bond HERO has no callable feature. Both bonds have the same number of years to maturity but different coupon rates. The coupon rate for Bonds HERO and WIRA are 5.5% and 6.5% respectively. If interest rate is expected to decline, which of the two bonds would you choose to own? Explain your rationale.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Interest rate and bond price have inverse relationship, mean when interest rate fall bond price will increase.
In this case Bond WIRA is callable bond with price of $ 1080, which mean when interest rate will fall bond price will not increase more than $ 1080 as bond is callable at $ 1080 by issuer.
On the other side Bond HERO is no callable bond, which mean if interest rate fall bond price will increase.
From above explanation if interest rate is expected to decline, choose Bond HERO.q
