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Compute the current yield on bonds

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Harold Reese must choose between two bonds: Bond X pays $85 annual interest and has a market value of $830. It has 13 years to maturity. Bond Z pays $91 annual interest and has a market value of $790.

It has six 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.)

Current Yield Bond X %

Bond Z %

b. Which bond should he select based on your answers to part a?

Bond Z

Bond X

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 10.92 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 a calculator or Excel to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Approximate yield to maturity %

Exact yield to maturity %

d. Has your answer changed between parts b and c of this question?

Reference no: EM133074605

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