Compare the decline in value

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Avi Erlander currently holds corporate bonds yielding six percent and government bonds yielding four percent. He is fascinated by the world of finance and is always on the lookout for higher yields. In 2021, VanCanada Airlines issued 20-year bonds paying a yield of 12 percent.

Mr. Erlander called Joanne, a financial analyst, for information. She mentioned that VanCanada Airlines has a low credit rating, compounded by the damage done to the industry because of the global pandemic.

Avi is excited to purchase VanCanada Airline bonds because of the potential return and does not seem phased by his conversation with Joanne.

Required:

-Assume the bonds are 20-years and have a maturity value of $1,000. What would the price of bonds be if poor market conditions increased the yield of the bonds to 15 percent in two years from now? (Annual analysis)

-Compare the decline in value calculated in part (a) to the initial interest advantage over Avi's government bonds. Does Avi come out ahead or behind by purchasing the VanCanada Airline bonds?

-Would you recommend the purchase of VanCanada Airline bonds to Avi? Please provide a thorough explanation of your answer.

Reference no: EM133109575

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