My objective is to evaluate bond yields for selecting bond investments. (Problem 16-3). I have learned that bonds are basically long-term debt issued by an organization (they are IOU's). I also learned that they are used to finance an organization's long-term goals, such as building warehouse facilities. Government bodies use them to build infrastructures like roads and bridges. Investors invest in bonds similar to stocks.

1. How would one complete problem 16-3 using the below information provided?

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.
a. Compute the current yield on both bonds. - SEE BELOW
b. Which bond should he select based on your answer to part a? - SEE BELOW
c. A drawback of current yield is that it does not consider the total life of the bond. - SEE BELOW
For example, the approximate yield to maturity on Bond X is 11.21 percent. What is the approximate yield to maturity on Bond Z?
d. Has your answer changed between parts b and c of this question in terms of which bond to select? - SEE BELOW
Solution
Problem 16-3
Instructions: Enter formulas to complete the requirements of this problem.
Information for completing below:
	Annual	Market	Years to
	Interest	Value	Maturity
Bond X	$95	$900	10
Bond Z	$95	$920	2
a. Compute the current yield on both bonds.
	Bond X	Bond Z
Current yield	FORMULA?	FORMULA?
b. Which bond should he select based on your answer to part a?
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 11.21 percent. What is the approximate yield to maturity on Bond Z?
Yield to maturity		FORMULA?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?

Answer rating: 100% (QA)

To compute the current yield for each bond you can use the following formula Current Yield Annual In... View the full answer