P16-4 objective bond yields. An investor must choose between two bonds:
Bond A pays $92 annual interest, has a market value of $875, and has 10 years
to maturity. Bond B pays $82 annual interest, has a market value of $900, and
has two years to maturity.
a. Compute the current yield on both
bonds.
b. Based on your computations above,
which bond should the investor select?
c. A drawback on the current yield
is that it does not consider the total life of the bond. For example, the
approximate yield to maturity on Bond A is 11.30%. What is the approximate
yield to maturity on Bond B?
d. Has your answer changed
between parts “b” and “c” of this question in terms of which bond to select?
Explain.
SOLUTION PREVIEW
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Current yield = Annual interest payment / Current
Bond Price
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|||||
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Bond
A:
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Bond
B:
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||||
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annual interest =
|
92
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annual interest =
|
82
|
||
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Current price =
|
875
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Current price =
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900
|
||
File name:
P16-4-An-investor-must-choose.xls
File type:
application/vnd.ms-excel Price: $7
