Given the information below which of the bonds would receive the best price?1. A corporate bond issued by Praxair Inc. with a yield of 2.9% and a tenure of 11 month. 2. A municipal bond with a...

Given the information below which of the bonds would receive the best price?

1. A corporate bond issued by Praxair Inc. with a yield of 2.9% and a tenure of 11 month.

2. A municipal bond with a tenure of 22 months and a yield of 3.32%

3. A US agencies bond issued by Federal Farm Credit Banks with a yield of 2% and a tenure of 16 months

Asked on by littlemay

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justaguide | College Teacher | (Level 2) Distinguished Educator

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It is assumed that the yield being referred to is the yield to maturity, all the bonds have the same par value and the value of the bonds at the end of the tenure is the same. The yield to maturity of a bond is the returns one gets when the bonds are held for the entire tenure.

In the case of the corporate bonds issued by Praxair Inc. with a yield of 2.9% and a tenure of 11 month, the YTM is (1 + r)^(11/12) = 1.029 where r is the coupon rate.

=> r = 3.167%

In the second case of the municipal bond with a tenure of 22 months and a yield of 3.32%, the YTM is (1 + r)^(22/12) = 1.0332 where r is the coupon rate

=> r = 1.79%

Finally, for the US agencies bond issued by Federal Farm Credit Banks with a yield of 2% and a tenure of 16 months, the YTM is (1 + r) ^ (16/12) = 1.02

=> r = 1.49%

As the corporate bond has the best rate of return of 3.167% it would receive the best price.

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