Jamal owns two 10-year bonds that both have a yield to maturity of 4% that pay interest annually.

Jamal owns two 10-year bonds that both have a yield to maturity of 4% that pay interest annually. One bond has a 4% coupon and trades at 100% (par). The other bond has a 2% coupon and trades at 83.78%.

What is the current yield of the 4% bond?
What is the current yield of the 2% bond?
If yields in general were to drop by 1% from 4% to 3%, how much would each bond change in price?

Which, if either, bond would perform the best in this scenario?

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Expert Solution

jeff jeffy answered 2 years ago

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