Please answer both parts. Thank you! An investor has exist1, 250 to invest and h
ID: 3260993 • Letter: P
Question
Please answer both parts. Thank you!
An investor has exist1, 250 to invest and his financial analyst recommends two types of junk bonds. The A bonds have a 9% annual yield with a default rate of 5%. The B bonds have a 6% annual yield with a default rate of 1%. (If the bond defaults, the exist1, 250 is lost.) Which of the two bonds is better? Why? Should ho select either bond? Why or why not? Which of the two bonds is better? Why? A. The B bonds are better because its expected value is greater than the A bonds. B. The B bonds are better because its expected value is lower than the A bonds. C. The A bonds are better because its expected value is greater than the B bonds. D. The A bonds are better because its expected value is lower than the B bonds. Should the investor select either bond? A. He should select neither because both the A and B bonds have negative expected values. B. He should select the A bonds because the expected value is greater than the B bonds. C. He should select the B bonds because the expected value is greater than the A bonds.Explanation / Answer
Solution:
Assuming a bond duration of 1 year, the expected return for bond A is
1250 * 1.09 * 0.95 = 1294.375
,and for bond B is 1250 * 1.06 * 0.99 = 1311.75.
Which of the two bonds is better? Why?
C) The A bonds are better because its expected value is greater than the B bonds.
Should the investor select either bond?
B) He should select the A bonds becase the expected value is greater than the B bonds.