Bond is current yield better estimate of yield to maturity

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Reference no: EM131340375

Two bonds have 10 years to maturity. Bond A has a coupon rate of 2.45% and a price of 99.805 (% of FV). Bond B has a coupon rate of 5.90% and a price of 105.214 (% of FV). The bonds make semi-annual coupon payments.

a. Which bond is selling at a premium to par, and which bond is selling at a discount to par?

b. What is the relationship between coupon rate and yield to maturity for bonds selling at a discount to par? What is the relationship between coupon rate and yield to maturity for bonds selling at a premium to par? Given your answer, will the yield to maturity on bond A be greater or less than 2.45%? Will the yield to maturity on bond B be greater or less than 5.90%?

c. Calculate the yield to maturity and current yield for each bond. For which bond is current yield a better estimate of yield to maturity?

Reference no: EM131340375

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