Youre considering investing in a 2-year 7% annual coupon bond priced at par. Alternatively, youll...
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Youre considering investing in a 2-year 7% annual coupon bond priced at par. Alternatively, youll consider a 1-year 5% annual coupon bond priced at par and subsequently reinvesting all your proceeds in another identical 1-year bond. You expect the 1-year bond will yield 9% next year. Assuming you turn out to be right, which approach would generate the higher return?
- Invest in the 2-year bond.
- Invest in the 1-year and reinvest the proceeds in another 1-year.
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