For each of the situations below, state which bond you would prefer and briefly justify your answer in each case.

Question

You are the manager for the bond portfolio of a superannuation fund. The policies of the fund allow
for the use of active strategies in managing the bond portfolio. It appears that due to the weak
economic prospects brought about by COVID–19 among other factors, growth is expected to below
par and the Reserve Bank of Australia, in an effort to spur economic expansion, is moving towards a
looser monetary policy.

For each of the situations below, state which bond you would prefer and briefly justify your answer in each case. (2 marks for each situation)

a) A 3% coupon Commonwealth of Australia non–callable bond due in 20 years.
Or
A 6% coupon Commonwealth of Australia non–callable bond due in 20 years.

b) Origin Energy Company 4.50% coupon, rated AAA due in 2040 and priced at 93.53 to yield
5.02% to maturity.
Or
AGL Limited 5.50% coupon, rated Baa due in 2040 and priced at 95.94 to yield 5.85% to
maturity.

c) Vale Company 3.75% coupon, rated Baa due in 2040 and callable at 105.
Or
Vale Company 7.75% coupon, rated Baa due in 2040 and callable at 105.

d) Origin Energy Company 3.50% coupon, non–callable bond rated AAA due in 2026 and priced
at 97.28 to yield 4.02% to maturity.