Assume you have two bonds. Bond A has 25 years to maturity, a 14% annual coupon

Question

Assume you have two bonds. Bond A has 25 years to maturity, a 14% annual coupon rate, and a maturity value of $1,000. Bond B has 25 year to maturity, a 6% annual coupon rate and a maturity value of $1,000. Both bonds sell at a yield to maturity of 10%.

1) Compute the price of the bonds at time period zero (give answer in dollars and cents).
A:


B:


2) Compute the current yield on both bonds (give answer to two decimal places as a percent, i.e., .1042 = 10.42%).

A:


B:


3) Compute the expected capital gain yield on both bonds (give answer to two decimal places as a percent, i.e., .1042 = 10.42%).


A:


B:


4 If an investor asks which bond would be a better investment, what would you say?

Explanation / Answer

1) a. Price is $1,363.08
b. Price is $636.92

2) a. 140/1363.08=10.27%
b. 60/636.92=9.42%

3) a. 10-10.27=-.27%
b. 10-9.42= .58%

4) b is a better option because it has a better expected capital gains yield

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