Question

Consider two bonds, HI and LI. The HI bond has a 10% coupon rate and the LI bond has a 5% coupon rate. Both bonds pay interest annually and are priced to yield 10%. Suppose the following interest scenarios are possible at the point in time when both bonds have five years remaining to maturity:

possible interest rate 5%,10,15

possibility of interest rate 10%, 50,40

Required:

a. Calculate the expected value for each bond.

b. Calculate the standard deviation of possible values for each bond.

c. Which bond is riskier? Why?

Answer 1

we will solve in EXCEl

the higher the return, the greater the risk. The second one is more risky.