Bond Yeilds
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An investor must choose between two bonds:
Bond A pays $92 annual interest and has a market value of $875. It has 10 years maturity. Bond B pays $82 annual interest and has a market value of $900. It has two years to maturity.
a. Compute the current yield on both bonds?
Bond A --- 92/875=10.5%
Bond B ---82/900 = 9.1%
b. Which bond should be select based on your answer to part a? Select Bond A due to the higher yield
c. A draw back of 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 percent. What is the approximate yield to maturity on Bond B?
d. Has your answer change between parts b and c of this question in terms of which bond to select?
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Answer is with the attachment.
(c) Answer:
As we know that,
Here, For bond B,
...
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
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