Question

An investor must choose between two bonds: Bond A pays $92 annual interest and has a market value of $825. It has 15 years to maturity. Bond B pays $83 annual interest and has a market value of $720. It has seven years to maturity. Assume the par value of the bonds is $1,000. a. Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Bond A Bond B Current Yield 11.15% 11.53 % b. Which bond should she select based on your answers to part a? O Bond B O Bond 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

Answer 1

b. Bond B as it has higher current yield

c.

Approximate YTM of bond B:-

=(83+((1000-720)/7))/((1000+720)/2)

=14.30%

Accurate YTM:-

=RATE(7,83,-720,1000)

=15.04%

d.

No