Investment strategy and junk vs. grade bonds
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please help with the following questions.
1. You are to choose between receiving $909 today or $1,000 in 12 months' time. Assuming interest rate of 10 per cent and rounding off the dollar, should you be indifferent between the two options? Why or why not? What does this tell you about the relationship between $1 today and $1 tomorrow?
2. Who are the rating services and what are their bond ratings? Based on the ratings, what are the differences between investment grade bonds and junk bonds? What do the ratings mean and how important are the ratings when buying a bond? When would buy an investment grade bond? When would you buy a junk bond?
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This solution helps with questions regarding interest rate and bond ratings.
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1. The $909 today growing at 10% would give you $1,000 in 12 months. On a purely numbers level this appears to be exactly the same as getting the $1,000 at the end of 12 months. However, if you take into account inflation, which is somewhere in the neighborhood of 3%, then it would be better to take the $909 today because once you take into ...
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