An investor must choose between two bonds: Bond A pays $90 annual interest and has a...

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Finance

An investor must choose between two bonds:
Bond A pays $90 annual interest and has a market value of $820.It has 10 years to maturity.
Bond B pays $95 annual interest and has a market value of $920.It has six years to maturity.

Assume the par value of the bonds is $1,000.

a. Compute the current yield on both bonds.(Do not round intermediate calculations. Input your answersas a percent rounded to 2 decimal places.)


b. Which bond should she select based on youranswers to part a?

Bond A
Bond B

c. A drawback of current yield is that it does notconsider the total life of the bond. For example, the approximateyield to maturity on Bond A is 12.11 percent. What is theapproximate yield to maturity on Bond B? The exact yield tomaturity? (Use the approximation formula to compute theapproximate yield to maturity and use the calculator method tocompute the exact yield to maturity. Do not round intermediatecalculations. Input your answers as a percent rounded to 2 decimalplaces.)


d. Has your answer changed between partsb and c of this question in terms of which bondto select?

Answer & Explanation Solved by verified expert

4.1 Ratings (714 Votes)

Part aCurrent yieldAnnual couponCurrent bond priceFor bond AGiven that annual coupon interest payment90Current market value of the bond820Current yield908200109756098 or 1098 Rounded up to twodecimal placesFor bond BGiven that annual coupon interest payment95Current market value of the See Answer

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An investor must choose between two bonds:Bond A pays $90 annual interest and has a market value of $820.It has 10 years to maturity.Bond B pays $95 annual interest and has a market value of $920.It has six years to maturity.Assume the par value of the bonds is $1,000.a. Compute the current yield on both bonds.(Do not round intermediate calculations. Input your answersas a percent rounded to 2 decimal places.) b. Which bond should she select based on youranswers to part a? Bond ABond Bc. A drawback of current yield is that it does notconsider the total life of the bond. For example, the approximateyield to maturity on Bond A is 12.11 percent. What is theapproximate yield to maturity on Bond B? The exact yield tomaturity? (Use the approximation formula to compute theapproximate yield to maturity and use the calculator method tocompute the exact yield to maturity. Do not round intermediatecalculations. Input your answers as a percent rounded to 2 decimalplaces.) d. Has your answer changed between partsb and c of this question in terms of which bondto select?