Computation of bond value and total value of the portfolio.
1. An investor must choose 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. Compute the current yield on both bonds.
b. Which bond should he select based on your answer to part a?
c. 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 A is 11.36 percent. What is 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. The Florida Investment Fund buys 90 bonds of the Gator Corporation through a broker. The bonds pay 8 percent annual interest. The yield to maturity (market rate of interest) is 10 percent. The bonds have a 25-year maturity.
Using an assumption of semiannual interest payments:
a. Compute the price of a bond (refer to \"Semiannual interest and bond prices\" in Chapter 10 for review if necessary).
b. Compute the total value of the 90 bonds.