# Current yield / yield to maturity

An investor must choose between two bonds with par values of $1,000:

Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity. Bond B pays $85 annual interest and has a market value of $900. It has two years to maturity.

a. Compute the current yield on both bonds.

b. Which bond should he select based on your answer to Part a?

c. A drawback of current yield is that it does not take into consideration the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.36 percent. 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?

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#### Solution Preview

a. Current yield = Annual Interest / Price

Bond A - Annual interest = $80 and the price is $800

Current Yield = 80/800 = 10%

Bond B - Annual interest = $85 and the price is ...