1. An investor should select between two bonds:
Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity.
Bone B pays $85 annual interest and has a market value of $900. It has two years to maturity.
a. Calculate current yield on both bonds.
b. Which bond must choose based on your answer to part a?
c. A drawback of current yield is that it does not consider total life of the bond. For example, approximate yield to maturity on Bond A is 11.36 percent. Determine the approximate yield to maturity on Bond B?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?
2. Florida Investment Fund purchases 90 bonds of the Gator Corporation through broker. Bonds pay 8 percent annual interest. Yield to maturity (market rate of interest) is 10 percent. Bonds have a 25-year maturity.
Using assumption of semiannual interest payments:
a. Calculate the price of a bond. Calculate the total value of the 90 bonds.