Yield to maturityThree years ago, ABC Company issued

10-year

bonds that pay

14%

semiannually.

Assume that the bond has a

$1,000-par-value.

a.If the bond currently sells for

$1,189,

what is the yield to maturity

(YTM)

on this bond?

b.If you are expecting the interest rate to drop in the near future and you want to gain profit by speculating on a bond, will you buy or sell this bond? Explain.

Question content area bottom

Part 1

a. The yield to maturity on this bond is

enter your response here%.

(Round to three decimal places.)

Part 2

b. If you are expecting the interest rate to drop in the near future and you want to gain profit by speculating on a bond, will you buy or sell this bond? Explain. (Select the best answer below.)

A.

You should not buy the bond. The relationship between bond price and bond yield is direct. If the interest rate drops in the near future, the bond price will decrease.

B.

You should buy the bond. The relationship between bond price and bond yield is inverse. If the interest rate drops in the near future, the bond price will increase.