Question

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Problem: Investing for maximum total return Imagine that you work as a financial advisor. You have a client who would like to invest \( \$ 750,000 \) in bonds. You have narrowed down your options to t

Answer 1

When investing in bonds, the price of the bond is influenced by the interest rate. If the interest rate is higher than the bond's coupon rate, the bond's price will be less than its face value.

Step-by-step explanation:

Problem: Investing for maximum total return

When investing in bonds, the price of the bond is influenced by the interest rate. If the interest rate is higher than the bond's coupon rate, the bond's price will be less than its face value. In this case, given that interest rates are now 12%, you know that you could invest $964 in an alternative investment and receive $1,080 a year from now. Therefore, the highest price you should pay for the original $1,000 bond is $964.