Question
Myra Breck must choose between two bonds: Bond A pays $100 annual interest with semiannual payment and has a market value of $800. It has
Myra Breck must choose between two bonds:
Bond A pays $100 annual interest with semiannual payment and has a market value of $800. It has 10 years to maturity.
Bond B pays $100 annual interest with semiannual payment and has a market value of $900. It has 2 years to maturity.
Assume the par value of the bonds is $1,000.
a. Compute the current yield on both bonds. (Round the final answers to 2 decimal places.)
Current yield | |
Bond A | % |
Bond B | % |
b. Which bond should she select based on the answer to part a?
-
Bond A
-
Bond B
c. A drawback of the current yield is that it does not consider the total life of the bond. What is the yield to maturity on these bonds? (Round the final answers to 2 decimal places.)
Yield to maturity | |
Bond A | % |
Bond B | % |
d. Has the answer changed between parts b and c of this question?
-
Yes
-
No
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