An asset manager at an insurance company is considering making a fixed income investment and holding it for 2 years. The manager is comparing two bond issues that have equal yield to maturity at origination. One is a semi-annual coupon bond paying 7%, maturing in 2 years, and priced at USD 101.86. The other is a zero-coupon bond, also maturing in 2 years, and priced at USD 88.85. The manager is uncertain about the outlook for interest rates over the next two years but will incorporate the forecast of the company’s economist when making the investment decision.
求The current annual yield
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