ABE has surplus cash which can be invested for at least five years. The company has consulted you to help them choose an investment that gives the shortest recovery period. The company presented the information on two types of bonds as follows;
Required:
Use Macaulay Duration method to advise ABE on the best Bond option to select for their investment. (12 marks)
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Advise:
The company should select Bond A for the Investment since it takes 4.4 years to recover the principal and interest compared to 5.06 years of Bond B. Bond B is risky.