Problem: An investor must choose between two bonds: Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity. Bond B pays $85 annual interest and has a market value of $900. it has two years to maturity.
Q1. Compute the current yield on both bonds.
Q2. Which bond should be select based on your answer to part a?
Q3. A draw back 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 11.36 percent. What is the approximate yield to maturity on Bond B?
Q4. Has your answer change between parts b and c of this question in terms of which bond to select?