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Mike and Dave are 2 brothers. Mike purchased, for a $100 price, a $100 face value bond that pays interest annually at 10%. The principal
Mike and Dave are 2 brothers. Mike purchased, for a $100 price, a $100 face value bond that pays interest annually at 10%. The principal is due and payable at the end of 5 years. Dave purchased, for a $100 price, a deeply discounted zero coupon bond that pays nothing annually, but that has a final lump sum payment of $161.05 at the end of 5 years.
What are the yields to maturity (YTM) of both bonds?
Which pays a higher yield?
How is the YTM different than the Internal Rate of Return (IRR)?
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