Question

An investor must choose between two bonds: Bond A pays $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has 2 years to maturity. Assume the par value of the bonds is $1,000. Compute the current yield on both bonds. Which bond should she select based on your answer to part a? A drawback of current yield is that it does not consider the total life of the bond. For example, the yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B? Has your answer changed between parts b and c of this question in terms of which bond to select?

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Answer 1

$12 $62 Annual Interest 6925 $910 mater value 10g 2 yn Yeary to Matinta Par Value 1000 1007 Interest Par Current Yreed Inter/Coupon Current - Bond Price ? $72 ? 925 $910 ? 7.784% 6. 813% S parte YTM - IFV-Price ) Coupon interest (n ) where, c-Coupon / Interest payment FL face value 72 +11on-925 62 +1000-910 p - Proce 2 an- years to matunty 109 79 26) (Porto = 8.259 ". 11.204% Tb) ter Drawbach of consider total life current Yieed doesn't of the bond. 40 to since ito /tm is 11:204% Bond ' higher Ď har than select Bond A.