You expect interest rates to fall in the eurozone. The rest of the market thinks that they will remain unchanged over the coming year. In each question, choose the bond that will provide the higher capital gain due to the longer duration if you are correct. Explain.
a. (1) A A-rated bond with coupon rate 10% and time to maturity 30 years.
(2) A B-rated bond with coupon rate 10% and time to maturity 30 years.
b. (1) A 30-year A-rated bond with coupon rate 10%, callable at 110 with YTM = 5%.
(2) A 30-year A-rated bond with coupon rate 5%, callable at 110 with YTM = 5%.
c. (1) A 5% coupon noncallable T-bond with maturity 10 years and YTM = 6%.
(2) A 5% coupon noncallable T-bond with maturity 30 years and YTM = 6%.
d. (1) A 5% coupon noncallable T-bond with maturity 10 years and YTM = 5%.
(2) A 5% coupon noncallable T-bond with maturity 10 years and YTM = 7%.
e. (1) A zero-coupon bond with maturity 30 years and YTM = 8%.
(2) A 10% coupon noncallable T-bond with maturity 30 years and YTM = 8%.