9.
Harold Reese must choose between two bonds:
Bond X pays $96 annual interest and has a market value of $955. It
has 12 years to maturity.
Bond Z pays $88 annual interest and has a market value of $940. It
has four years to maturity.
Assume the par value of the bonds is $1,000.
a. Compute the current yield on both bonds.
(Do not round intermediate calculations. Input your answers
as a percent rounded to 2 decimal places.)
b. Which bond should he select based on your
answers to part a?
Bond X | |
Bond Z |
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 X is 10.25 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.)
d. Has your answer changed between parts
b and c of this question?
Yes | |
No |
9.
Harold Reese must choose between two bonds:
Bond X pays $96 annual interest and has a market value of $955. It has 12 years to maturity.
Bond Z pays $88 annual interest and has a market value of $940. It has four years to maturity.
Assume the par value of the bonds is $1,000.
a.
Bond X=96/955=10.0524%
Bond Z=88/940=9.3617%
b.
Bond X
c.
Approximate yield:=(88+(1000-940)/4)/((1000+940)/2)=10.6186%
Exact YTM for Bond X:=RATE(12,96,-955,1000)=10.2692%
Exact YTM for Bond Z:=RATE(4,88,-940,1000)=10.7225%
d.
Yes, We now prefer Bond Z
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