Predicting Bond Values (Use the chapter appendix to answer this problem.) The portfolio manager of Ludwig Company has excess cash that is to be invested for four years. He can purchase four-year Treasury notes that offer a 9 percent yield.
Alternatively, he can purchase new 20-year Treasury bonds for $2.9 million that offer a par value of $3 million and an 11 percent coupon rate with annual payments. The manager expects that the required return on these same 20-year bonds will be 12 percent four years from now.
a. What is the forecasted market value of the 20-year bonds in four years?
b. Which investment is expected to provide a higher yield over the four-year period?