91Ó°ÊÓ

The current yield is the rate of interest as per the current market price. It compares the annual interest with the current market price to determine the fluctuation with the normal yield.

$\begin{array}{rcl}\mathbf{Current}\mathbf{}\mathbf{yield}\mathbf{}\mathbf{for}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{X}& \mathbf{=}& \frac{\mathbf{Annual}\mathbf{}\mathbf{Interest}\mathbf{}\mathbf{for}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{X}\mathbf{}}{\mathbf{Current}\mathbf{}\mathbf{market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{X}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{95}}{\mathbf{\$}\mathbf{900}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{105}\mathbf{}\mathbf{or}\mathbf{}\mathbf{10}\mathbf{.}\mathbf{50}\mathbf{\%}\end{array}$

$\begin{array}{rcl}\mathbf{Current}\mathbf{}\mathbf{yield}\mathbf{}\mathbf{for}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{Z}& \mathbf{=}& \frac{\mathbf{Annual}\mathbf{}\mathbf{Interest}\mathbf{}\mathbf{for}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{Z}}{\mathbf{Current}\mathbf{}\mathbf{market}\mathbf{}\mathbf{value}\mathbf{}\mathbf{of}\mathbf{}\mathbf{bond}\mathbf{}\mathbf{Z}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{95}}{\mathbf{\$}\mathbf{920}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{1030}\mathbf{}\mathbf{or}\mathbf{}\mathbf{10}\mathbf{.}\mathbf{30}\mathbf{\%}\end{array}$

Bond X will selected by the investor because it has higher current yield than Bond Z.

Let’s suppose maturity value = $1,000

$\begin{array}{rcl}\mathbf{Yield}\mathbf{}\mathbf{to}\mathbf{}\mathbf{maturity}\mathbf{}\mathbf{on}\mathbf{}\mathbf{Bond}\mathbf{}\mathbf{Z}& \mathbf{=}& \frac{\mathbf{Annual}\mathbf{}\mathbf{Interest}\mathbf{+}{\displaystyle \frac{\mathbf{Maturity}\mathbf{}\mathbf{value}\mathbf{-}\mathbf{Current}\mathbf{}\mathbf{price}\mathbf{}}{\mathbf{Maturity}\mathbf{}\mathbf{Period}}}}{{\displaystyle \frac{\mathbf{Maturity}\mathbf{}\mathbf{value}\mathbf{-}\mathbf{Current}\mathbf{}\mathbf{price}}{\mathbf{2}}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{95}\mathbf{+}{\displaystyle \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{920}}{\mathbf{2}}}}{{\displaystyle \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{920}}{\mathbf{2}}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{135}}{\mathbf{\$}\mathbf{960}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{1406}\mathbf{}\mathbf{or}\mathbf{}\mathbf{14}\mathbf{.}\mathbf{06}\mathbf{\%}\end{array}$

Yes, the recommendation would change between parts b and c. As yield to maturity considers the maturity period, the bond Z would be preferred because it provides a higher yield to maturity than the bond X.

As against the current yield, bond Z is having higher yield to maturity due to a shorter maturity period. Thus, In this case, bond Z would be preferred over bond X.