You are advising a client who is evaluating two potential bond investments. Bond A is a zero coupon bond with a face value of 1000 maturing in 8 years. It's current market price is 676.84. Bond B has an annual coupon rate of 6% and makes semiannual interest payments. It also has a face value of 1000 and matures in 8 years. Bond b has a market value of 939.53. Your client expects to make a large investment in one of these bonds for the next 5 years.

 

A. The yield to maturity for bond A is 5%. Compute the yield to maturity for bond B. What are you implicitly assuming when you compute yield to maturity?
 

B. After 5 years you expect the price for bond A to 813.50 and bond b to be 922.63. Compute the realized or horizon yield for each bond over the 5 year holding period. Coupons for Bond B are assumed reinvested at an annual rate of 2%. Based on your analysis , which bond is a better option for your client?