Problem:
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.
1) Compute the current yield on both bonds?
2) Which bond should be select based on your answer to part (1)?
3) 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?
4) Has your answer change between parts b and c of this question in terms of which bond to select?