Waterway, Inc., has bonds outstanding that will mature in 8 years. The bonds have a face...

Waterway, Inc., has bonds outstanding that will mature in 8 years. The bonds have a face value of $1,000. These bonds pay interest semiannually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $901.92, what is the yield to maturity that an investor who buys them today can expect to earn? (Round answer to 1 decimal place, e.g. 5.2%.)

Yield to maturity

What is the effective annual yield? (Round answer to 3 decimal places, e.g. 5.275%.)

Effective annual yield

Solutions

Expert Solution

What is the Yield To Maturity (YTM)?

Answer: 3.1% (3.063% rounded to 3.1%)

What is the effective annual yield?

Answer: 3.086%

Working

Formula for calculating Yield To Maturity (YTM)

F (i.e. Face value) = $1000

P (i.e. current price) = $901.92

N = period = 16 (8 year * 2 (i.e. semiannual coupon payment)

C (i.e. coupon) = Face value * Coupon Rate

= $1000 * 2.3%

= $23

(Note: since coupons are paid semiannually so coupon rate will be 2.3% (i.e. 4.6% ÷2)

Effective annual yield – Calculation.

Formula for calculating effective annual yield is as follows

jeff jeffy answered 1 year ago

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