# Financial Management: P16-2 Harold Reese must choose between two bonds

Financial Management

Problem 16-2 Bond yields

Harold Reese must choose between two bonds:

Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity.

Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity.

Assume the par value of the bonds is $1,000.

Required:

a. Compute the current yield on both bonds. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

b. Which bond should he select based on your answer to requirement 1?

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 11.17 percent. What is the approximate yield to maturity on Bond Z? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

d. Has your answer changed between requirements 2 and 3 of this question in terms of which bond to select?

Problem 16-2 Bond yields

Harold Reese must choose between two bonds:

Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity.

Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity.

Assume the par value of the bonds is $1,000.

Required:

a. Compute the current yield on both bonds. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

b. Which bond should he select based on your answer to requirement 1?

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 11.17 percent. What is the approximate yield to maturity on Bond Z? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

d. Has your answer changed between requirements 2 and 3 of this question in terms of which bond to select?

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