Compared to identical option-free bond

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Reference no: EM132055651

1. You are considering the purchase of Bond X, which matures in ten years and has a par value of $1000. During the first five years, X has a 6% coupon with semi-annual payments. During the remaining five years, X has an 8% coupon with semi-annual payments. The face value is paid at maturity. A second 10-year security, Security Z, has a 6% semiannual coupon and is selling at par. Assuming that X has the same (bond equivalent) yield as Z, the price of Bond X is closest to:

a. $943

b. $1,036

c. $1,063

2. Which of the following is an advantage of a callable bond (compared to an identical option-free bond)?

a. Less reinvestment risk

b. Higher yield

c. More convexity

Reference no: EM132055651

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