Question
Harold Reese must choose between two bonds: Bond X pays $76 annual interest and has a market value of $840. It has 10 years to
Harold Reese must choose between two bonds: Bond X pays $76 annual interest and has a market value of $840. It has 10 years to maturity. Bond Z pays $86 annual interest and has a market value of $800. It has three 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.) b. Which bond should he select based on your answers to part a? Bond Z Bond X
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 10.18 percent. What is the approximate yield to maturity on Bond Z? The exact yield to maturity? (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) d. Has your answer changed between parts b and c of this question? No Yes Expert Answer Vinnykan answered this Was this answer helpful? 2 0 1,055 answers Solution: Bond X : Face value = 1000, current value= $840, Coupon = 76 and Maturity = 10 years Bond Z : Face value = 1000, current value= $800, Coupon = 86 and Maturity = 3 years Part A ) Current yield = Coupon / Current price Current yield of bond X = 76 / 840 = 9.05% Current yield of Bond Z = 86 / 800 = 10.75% Part B ) We will select bond Z as it has a higher current yield
I tried entering Part C answers on my Connect homework but it says these answers are incorrect so I need to see if there are any other possible answers for this Part C of this question?
Part C ) Approximate yield formula YTM for bond Z = (86 + (1000-800)/3) / (( 1000+800)/2) = (86+66.67) / 900 = 16.96% Exact yield to maturity : Answer = 16.59%
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