Harold Reese must choose between two bonds: Compute the current yield on both bo
ID: 2766644 • Letter: H
Question
Harold Reese must choose between two bonds:
Compute the current yield on both bonds
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 13.44 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.)
Bond X pays $82 annual interest and has a market value of $710. It has 10 years to maturity. Bond Z pays $88 annual interest and has a market value of $750. It has five years to maturity. Assume the par value of the bonds is $1,000.Explanation / Answer
a.Current Yield of Bond = Annual Coupon Payment / Current Market Price
Bond X = 82 / 710 = 11.55%
Bond Z = 88 / 750 = 11.73%
b. Bond Z
c. YTM = [C + (Par Value - Current Value) / n] / (Par Value + Current Value) / 2 * 100
Bond Z YTM = [88 + (1000 - 750) / 5] / (1000 + 750) / 2 = 138 / 875 * 100= 15.77%
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