Answer:
a) For Bond X = 11.55%
For Bond Z = 11.73 %
b) Bond Z
c) Approximate YTM = 15.77%
Exact yield to maturity = 16.53 %
Step-by-step explanation:
Bond X : pays $82 annual interest , market value = $710 and years to maturity =10
Bond Z: pays $88 annual interest, market value = $750 , Years to maturity= 5
par value of bonds = $1000
a) Current yield on both bonds
For Bond X : annual interest / market value = 82 / 710 = 11.55%
For Bond Z : Annual interest / market value = 88 / 750 = 11.73%
b) The Bond that should be selected = Bond Z
C) Calculate the approximate yield to maturity on Bond Z and exact yield to maturity
i) Yield to maturity on Bond Z
[C + (Par Value - Current Value) / n] / (Par Value + Current Value) / 2
where: C = 88 , par value = 1000, Current value = $750, n = 2
∴ YTM on Bond Z = 0.1577 = 15.77%
ii) Exact yield to maturity = 16.53 %