Masters Corp. issues two bonds with 18-year maturities. Both bonds are callable at $1,060. The first bond is issued at a deep discount with a coupon rate of 8% to yield 14.9%. The second bond is issued at par value with a coupon rate of 16.50%.
a. What is the yield to maturity of the par bond? (Round your answer to 2 decimal places.)
Yield to maturity %
b. If you expect rates to fall substantially in the next two years, which bond would you prefer to hold?
Bond with a coupon rate 8%
Bond with a coupon rate 16.50%