Harold Reese must choose between two bonds: Bond X pays $95 annual interest and has a market value of $905. It has 13 years to maturity. Bond Z pays $85 annual interest and has a market value of $910. It has five 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 X Bond Zc. 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 10.85 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.) Approximate yield to maturity % Exact yield to maturity %d. Has your answer changed between parts b and c of this question? Yes No

Yes , answer would changed between parts b and c of this question as A drawback of current yield is that it does not consider the total life of the bond .

batolisis batolisis · Answer 2 · 2025-03-25T19:22:42-04:00

A) The current yields on bonds

Bond X = 10.50%
Bond Z = 9.34%

B) Bond X should be chosen

C) Approximate value of Bond Z = 10.80%

Exact value of Bond Z = 10.93%

D) Yes the answer between part b and c

Given data :

Bond X : Annual interest = $95

market value = $905

years to maturity = 13 years

Bond Z : Annual interest = $85

market value = $910

years to maturity = 5 years

Par value of Bonds = $1000

A) Determine the current yield bonds on Bonds X and Z

Current yield = Annual interest / market value

For Bond X :

= $95 / $905 = 0.10497 = 10.50%

For Bond Z :

= $85 / $910 = 0.0934 = 9.34%

B) The Bond that should be chosen based on current yield value is Bond X because it has a higher current yield value

C) Determine the approximate yield and and exact yield of the bond Z

Approximate yield of Bond Z

Applying the approximation formula below

Approx formula : ( Annual Coupon + ( Maturity value - Current price ) /period) / ( (Maturity value + Current price) / 2 ) ------ ( 1 )

where : maturity value = $1000, current price = $910, period = 5 ,

Annual coupon = $85 . insert values into equation ( 1 ) above

back to equation ( 1 )

∴ Approximate value of Bond Z ≈ 10.80%

Exact yield of Bond Z

Applying the calculator method

= rate( nper, pmt, pv, fv)

= rate ( 5, 85, -910, 1000 ) ( excel formula )

= 10.93%

D) The answer will change between parts b and c because the current yield value does not consider the total lifespan of the bond.

Hence In Conclusion the current yield, approximate yield and exact yield of the bonds are as listed above in the answer.

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