Answer:
Explanation:
a)
current yield of bond x = annual interest/market value
current yield of bond x = 95/905
current yield of bond x = 10.50%
current yield of bond Z = annual interest/market value
current yield of bond Z = 85/910
current yield of bond Z = 9.34%
b)
Bond X should be selected based on current yield
c)
<u>Bond Z
</u>
Approximate yield to maturity = (Annual Coupon + (Maturity value - Current price)/period)/ ( (Maturity value+ Current price)/2)
Approximate yield to maturity = (85+ (1000-910)/5)/((1000+910)/2)
Approximate yield to maturity = 10.79%
Exact yield to maturity = rate(nper,pmt,pv,fv)
Exact yield to maturity = rate(5,85,-910,1000)
Exact yield to maturity = 10.93%
d)
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
.
