Compute the current yield on both bonds. (Do not round intermediate calculations

Question

Compute the current yield on both bonds. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

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 10.99 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.)

Explanation / Answer

Details Bond X Bond Z Annual Interest                        80                           90 Market Value                     820                        780 a Current Yield=Annual Interest/Market Value= 9.76% 11.54% b Bond Z be selected on the basis of   current yield c Bond Z details Par value                  1,000 Market Price                     780 Annual Interest                        90 Years to Maturity                          6 YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM = [90+(1000-780)/6]/(1000+780*2)/3 YTM =14.79% So approx YTM for Bond Z =14.79% As the coupon is annual the actual YTM should also be 14.79%

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