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Bond Yield: An investor must choose between two bonds.

An investor must choose between two bonds: 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 be select based on your answer to part a?
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 11.36 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?

Solution Preview

Bond Yield
An investor must choose between two bonds: 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.

Bond A
Current yield = Annual Coupon Payment/Current Price
= 80/800
= 10%
Bond B
Current yield = Annual Coupon Payment/Current Price
= 85/900
= 9.44%
b. Which bond should be ...

Solution Summary

This solution provides calculation and explanation to compute the current yield on both bonds, answers which bond to select, and what is the approximate yield to maturity on Bond B.

$2.19