Problem:
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.
1) Compute the current yield on both bonds.
2) Which bond should he select based on your answer in part (1)?
3) 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 11.17 percent. What is the approximate yield to maturity on Bond Z?
4) Has your answer changed between parts (2) and (3) of this question?