Lantech investor is deciding between two bonds:  Bond A pay $72 annual interest and has a market value of $925.  It has 10 years to maturity.  Bond B pays $62 annual interest and has a market value of $910.  It has two years to maturity.  Par value of the bonds is $1,000.A. What is the current yield on both bonds?B. Which bond should be chosen and why?C. A drawback of current yield is that is doesn't consider the total life of the bond.  E.g. Yield to maturity on Bond A is 8.33 percent.  What is the yield to maturity on Bond B?D. Is your answer changed from parts B and C based on which bond should be chosen?

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Asked Apr 16, 2019
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Lantech investor is deciding between two bonds:  Bond A pay $72 annual interest and has a market value of $925.  It has 10 years to maturity.  Bond B pays $62 annual interest and has a market value of $910.  It has two years to maturity.  Par value of the bonds is $1,000.

A. What is the current yield on both bonds?

B. Which bond should be chosen and why?

C. A drawback of current yield is that is doesn't consider the total life of the bond.  E.g. Yield to maturity on Bond A is 8.33 percent.  What is the yield to maturity on Bond B?

D. Is your answer changed from parts B and C based on which bond should be chosen?

 

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Step 1

Since you have asked multiple sub parts in the question, I will address the first three sub parts. Please post the balance subparts as a separate question.

Part (a)

Current yield on a bond = Annual coupon  / Current market value

For Bond A, current yield, CYA = 72 / 925 = 7.78%

For Bond B, current yield, CYB = 62 / 910 = 6.81%

Step 2

Part (b)

Based on the current yield, since CYA &g...

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