Consider the following bonds: Bond A: 10% coupon, paid annually, matures in 3 years Bond B: 8%...

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Finance

Consider the following bonds:
Bond A: 10% coupon, paid annually, matures in 3 years
Bond B: 8% coupon, paid annually, matures in 2 years
If Bond A is selling for $1,060 and Bond B is selling for $940,what is the yield to maturity on a portfolio consisting 30% of BondA and 70% of Bond B?
A. 8.60%
B. 9.00%
C. 9.61%
D. 10.38%

Answer & Explanation Solved by verified expert

4.4 Ratings (774 Votes)

Bond A

K = N

Bond Price =? [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =3

1060 =? [(10*1000/100)/(1 + YTM/100)^k] + 1000/(1 + YTM/100)^3

k=1

YTM% = 7.69

Bond B

K = N

Bond Price =? [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =2

940 =? [(8*1000/100)/(1 + YTM/100)^k] + 1000/(1 + YTM/100)^2

k=1

YTM% = 11.53

Weight of Bond A = 0.3

Weight of Bond B = 0.7

YTM of Portfolio = Weight of Bond A*YTM of Bond A+Weight of Bond B*YTM of Bond B

YTM of Portfolio = 7.69*0.3+11.53*0.7

YTM of Portfolio = 10.38

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Transcribed Image Text

Consider the following bonds:Bond A: 10% coupon, paid annually, matures in 3 yearsBond B: 8% coupon, paid annually, matures in 2 yearsIf Bond A is selling for $1,060 and Bond B is selling for $940,what is the yield to maturity on a portfolio consisting 30% of BondA and 70% of Bond B?A. 8.60%B. 9.00%C. 9.61%D. 10.38%