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    Harold Reese must choose between two bonds; compute yields

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    Harold Reese must choose between two bonds: Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity.

    Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity.

    a. Compute the current yield on both bonds.
    b. Which bond should he select based on your answer in part a?
    c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 11.17 percent. What is the approximate yield to maturity on Bond Z?
    d. Has your answer changed between parts b and c of this question?

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    Solution Preview

    a. Compute the current yield on both bonds.
    Bond X = 95/900=10.56
    Bond Z = 95/920=10.33

    b. Which bond should he select based on your answer in part a?
    Bond X is selected based on ...

    Solution Summary

    The solution examines Harold Reese choosing between two bonds. Yields are computed.

    $2.19

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