(This problem uses the material in Appendix 14B concerning bond valuation.) Two bonds have the following features:

Bond A Bond B Principal $1,000 Principal $1,000 Coupon 6% Coupon 12%

Maturity 5 years Maturity 5 years The structure of yields is Term Interest Rate 1 year 6%

2 years 7%

3 years 8%

4 years 9%

5 years 10%

a) What is the valuation of each security based on the yield to maturity for a five-year bond?

b) What is the valuation based on the structure of yields?

c) Given the valuations in (b), what is each bond’s yield to maturity?

d) Do the yields to maturity in

(c) differ from each other and from the assumed yield to maturity in (a)?

e) Given the price of bond A in (a), what would you do? Why?