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.

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 1 year ago

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