An investor must choose between two bonds:
Bond A pays $92 annual interest and has a market value of $875. It has 10 years maturity. Bond B pays $82 annual interest and has a market value of $900. It has two years to maturity.
Q1. Compute the current yield on both bonds?
Bond A --- 92/875=10.5%
Bond B ---82/900 = 9.1%
Q2. Which bond should be select based on your answer to part (1)? Select Bond A due to the higher yield
Q3. A draw back 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 11.30 percent. What is the approximate yield to maturity on Bond B?
Q4. Has your answer change between parts b and c of this question in terms of which bond to select?