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1. An investor should select between two bonds:

Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity.

Bone B pays $85 annual interest and has a market value of $900. It has two years to maturity.

a. find out current yield on both bonds.

b. Which bond must choose based on your answer to part a?

c. A drawback of current yield is that it does not consider total life of the bond. For ex, approximate yield to maturity on Bond A is 11.36 percent. Determine the approximate yield to maturity on Bond B?

d. Has your answer changed between parts b and c of this problem in terms of which bond to select?

2. Florida Investment Fund purchases 90 bonds of the Gator Corporation through broker. Bonds pay 8 percent annual interest. Yield to maturity (market rate of interest) is 10 percent. Bonds have a 25-year maturity.

Using assumption of semiannual interest payments:

a. find out the price of a bond. find out the total value of the 90 bonds.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M921611

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