Masters Corp. issues two bonds with 18-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $640 to yield 8.0%. The second bond is issued at par value with a coupon rate of 9.35%.
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 4%
Bond with a coupon rate 9.35%