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Compare two bonds. Company A is selling 20 year bonds with a $50,000 par value and...

Compare two bonds. Company A is selling 20 year bonds with a $50,000 par value and an annual coupon rate of 6.25%. The price of Company B's bonds is currently $11,200. They offer a $10,000 par value and mature in 10 years. The coupon rate is 8% and coupon payments are made semi-annually. Further research suggests to you that both bonds, which are rated as A+, introduce the same risk to you as an investor.

What is the yield to maturity for Company B's bonds?

ANSWER:

1) None of the below

2) 0.0318

3) 3.18% semi-annually

4) .318%

5) $1,000

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Answer #1

Calculating Yield to Maturity of Bond B,

using TVM Calculation,

I = [PV = -11,200, FV = 10,000, N = 20, PMT = 400]

I = 0.0636

So,

Yield to Maturity of Bond B = 6.36%

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