In: Finance
#23 ch.7: semi-annual bond ; coupon = 7.2; matures=14 yrs; Last Price=108.96What is YTM, CY and effective Yield.
(a)-Yield to maturity of (YTM) of the Bond
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 7.20% x ½] |
PMT |
36 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [14 Years x 2] |
N |
28 |
Bond Price [-$1,000 x 108.96%] |
PV |
-1,089.60 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity (YTM) on the bond = 3.115%.
The semi-annual Yield to maturity = 3.115%.
Therefore, the annual Yield to Maturity of the Bond = 6.23% [3.115% x 2]
“Hence, the Yield to maturity of (YTM) of the Bond will be 6.23%”
(b)-Current Yield on the Bond
Current Yield on the Bond = [Annual Coupon amount / Market Price of the Bond] x 100
= [($1,000 x 7.20%) / ($1,000 x 108.96%)] x 100
= [$72 / $1,089.60] x 100
= 6.61%
(c)-Effective Annual Yield
Number of Compounding per year = 2 (Since, the compounding is done semi-annually)
Therefore, the Effective Annual Yield = [(1 + (YTM/2)]2 – 1
= [(1 + (0.0623/2)] 2 – 1
= [1 + 0.03115]2 – 1
= [1.03115] 2 – 1
= 1.063270 - 1
= 0.063270 or
= 6.33% (Rounded to 2 decimal place)
“Hence, the Effective Annual Yield on the Bond will be 6.33%”