Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.5​%,but she expects them to fall to 8.5​% within a year. As a​ result, Stacy is thinking about buying either a​ 25-year, zero-coupon bond or a​ 20-year, 9.0​% bond.​ (Both bonds have​ $1,000 par values and carry the same agency​ rating.) Assuming that Stacy wants to maximize capital​ gains, which of the two issues should she​ select? What if she wants to maximize the total return​ (interest income and capital​ gains) from her​ investment? Why did one issue provide better capital gains than the​ other? Based on the duration of each​ bond, which one should be more price​ volatile?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.5​%,but she expects them to fall to 8.5​% within a year. As a​ result, Stacy is thinking about buying either a​ 25-year, zero-coupon bond or a​ 20-year, 9.0​% bond.​ (Both bonds have​ $1,000 par values and carry the same agency​ rating.) Assuming that Stacy wants to maximize capital​ gains, which of the two issues should she​ select? What if she wants to maximize the total return​ (interest income and capital​ gains) from her​ investment? Why did one issue provide better capital gains than the​ other? Based on the duration of each​ bond, which one should be more price​ volatile?
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