Question: An investor must choose between two bonds: Bond A pays $92 annual interest and has a market value of $875. It has 10 years to maturity. Bond B pays $82 annual interest and has a market value of $900. It has two years to maturity.
a. Compute the current yield on both bonds.
b. Which bond should she 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 A is 11.30 percent. What is the approximate yield to maturity on Bond B?
d. Has your answer changed between parts b and c of this question in terms of which bond to select?