Which if the following would you prefer to be buying based on yield to maturity (assume...

Which if the following would you prefer to be buying based on yield to maturity (assume n = 25)? A) A $10,000 par value security with a 9% coupon rate selling for $9,000 B) A $15,000 par value security with a 7% coupon rate selling for $15,700 C) A $20,000 par value security with a 9% coupon rate selling for $20,500. D) A $25,000 par value security with a 7% coupon rate selling for $25,500.

Solutions

Expert Solution

The yield to maturity is the expected total return on the bond if that is held until the maturity of the instrument.
The formula for YTM can given as

	A	B	C	D
Par value	10000	15000	20000	25000
Market Price	9000	15700	20500	25500
Coupon rate	9%	7%	9%	7%
Year to Maturity	25	25	25	25

YTM	10.11%	6.61%	8.75%	6.83%

Bond A is the most preferable as it has highest yield to maturity.

Another approach is the premium and discount offered by the bond.
Considering the current price and par value of all the bonds, only bond A is at the discount while other 3 are trading at a premium. This indicates that bond A will definitely have a higher YTM than other 3 bonds.

Par Value Market Price Number of Years to Maturity Annual Interest + Yield to Maturity Par Value +Market Price

Rahul Sunny answered 9 months ago

Next > < Previous

Related Solutions

2. Which of the following bonds would you prefer to be buying? Assume n = 30...

2. Which of the following bonds would you prefer to be buying? Assume n = 30 for all bond maturities. A) A $10,000 face-value security with a 6% coupon rate selling for $9,000. B) A $10,000 face-value security with a 6% coupon rate selling for $10,000. C) A $10,000 face-value security with a 6% coupon rate selling for $11,000. D) A $10,000 face-value security with a 7% coupon rate selling for $9,500. E) A $10,000 face-value security with a 7% coupon rate selling for $11,500....

Of the following car financing options, which one would you prefer while assuming that you prefer...

Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions? A) A lump-sum payment of $20,000 in two years from today B) A payment of $10,000 today and another of $10,000 in one year from today C) A lump-sum payment of $19,000 today only D) A lump-sum payment of $20,000 today only (Please...

26) In which of the following situations would you prefer to be the lender?

SCENARIO 4. Notation: C = currency; D = demand deposits; T = time deposits; & S = saving deposits. Suppose M1 = C + D; M2 = C + D + T; M3 = C + D + T + S. Suppose also that C = .05D; T = .4D; & S = .3D. The Fed imposes the following reserve requirements: rd = .2; rt = .3; rs = .15. Banks keep the following excess reserve ratios: ed = .05;...

Which of the following is a not correct? a. The yield to maturity (YTM) and the...

Which of the following is a not correct? a. The yield to maturity (YTM) and the internal rate of return (IRR) are the same b. The YTM and the IRR both suffer from the reinvestment rate assumption. c. The YTM suffers from the reinvestment problem when market interest rates change. d. The IRR suffers from the reinvestment problem when the general level of interest rates change. e. The realized compound yield corrects YTM; the modified internal rate of return corrects...

1.in which of the following situations would you prefer to be giving a loan ? a...

1.in which of the following situations would you prefer to be giving a loan ? a interest rate 4 inflation 1 % b interest rate 9 inflation 7% c interest rate 3 inflation 4% d interest rate 8 inflation 2

How would you explain yield to maturity (YTM) and yield to call (YTC) to a friend...

How would you explain yield to maturity (YTM) and yield to call (YTC) to a friend with no background in finance? What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain.

Assume you own a bond with a 5% coupon, a 6% yield-to-maturity, 5 years to maturity,...

Assume you own a bond with a 5% coupon, a 6% yield-to-maturity, 5 years to maturity, and a $1,000 par value. It is currently priced at $957.35. If the yield-to-maturity increases to 8.0%, what is the price of the bond? Select one: a. $1,043.76 b. $878.33 c. $1,000 d. $1,087.52

Use intuition to decide which of the following you would prefer: (a) a salary of $35,000...

Use intuition to decide which of the following you would prefer: (a) a salary of $35,000 per year with no raises for 10 years or (b) a salary of $32,000 per year with annual raises of 3% per year of each of the next 10 years. Explain the reason for your choice.

Assume you are a corporate shareholder. Would you prefer to receive a stock dividend or a...

Assume you are a corporate shareholder. Would you prefer to receive a stock dividend or a cash dividend? Why? Now assume you are a corporation. Would you prefer to issue a stock dividend or a cash dividend? Why? Why do you think a company would want to retain earnings as opposed to distributing it to its shareholders? In your opinion, why would a company decide to perform a stock split?

An 8 year bond has a yield to maturity of 6%. Which would result in the...

An 8 year bond has a yield to maturity of 6%. Which would result in the smallest % change in the bond’s price, a rise to 7% or a fall to 5%? Why?

Subjects