Question

Harold Reese must choose between two bonds: Bond X pays $82 annual interest and has a market value of $935. It has 12 years to maturity. Bond Z pays $75 annual interest and has a market value of $920. It has eight 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

Answer 1

Answer:a)Bond X=8.77%; Bond Z=8.15%

b) Bond X

Explanation:

We will first Calculate the Current Yield of both bonds

Current Yield on Bond X = Annual Interest / Market Value

= 82 / 935 =0.0877 x100%= 8.77%

Current Yield on Bond Z = Annual Interest / Market Value

= 75 / 920

= 0.0815217391 X 100%=8.15%

(b.) Harold Reese should choose Bond X as it has higher current yield of 8.77%