Question

Hacker Software has 9 percent coupon bonds on the market with 20 years to maturity. The bonds make semiannual payments and currently sell for 107.3 percent of par.

What is the current yield on the bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Current yield

%

What is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

YTM

%

What is the effective annual yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual yield

%

Answer 1

- Face Value of Bond = $1000

- Semi-annual coupon payment = $1000*9%*1/2

= $45

- Current price of Bond = $1000*107.3%

= $1073

- No of coupon payments = No of years to maturity*2

= 20 years*2

= 40

a). Current Yield = Yearly Coupon Payments/Current Price

= ($45*2)/$1073

= 8.39%

b). Calculating the Semi-annual YTM using Excel Rate Function:-

Semi-annual YTM = 4.1243%

Annual YTM = 4.1243%*2

= 8.2486%

So, YTM is 8.25%

c). Calculating Effective ANnual Yield(EIY) of semi-annual compounding:-

EIY = 1.8420 - 1

EIY is 8.40%