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Question: An investor must choose between two bonds: Bond A pays $80 annual interest and has a market value of $800. It has 10 years to maturity. Bond B pays $85 annual interest and has a market value of $900. It has two years to maturity.

a. Compute the current yield on both bonds.

b. Which bond should he select based on your answer to part a?

c. 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 A is 11.36 percent. What is the approximate yield to maturity on Bond B?

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

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