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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?

#### 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