find the EAY of a bond maturing in 18 years with a coupon rate of 12%...

find the EAY of a bond maturing in 18 years with a coupon rate of 12% and market price of 1347.31

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Expert Solution

Information provided:

Face value= future value= $1,000

Market price= present value= $1,347.31

Time= 18 years

Coupon rate= 12%

Coupon payment= 0.12*$1,000= $120

The question is solved by first computing the yield to maturity.

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,347.31

N= 18

PMT= 120

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 8.2338.

Therefore, the yield to maturity is 8.23%.

The effective annual yield is calculated using the below formula:

Effective annual yield= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

effective annual yield = (1+0.0823/1)^1 - 1

= 1.0823 - 1

= 0.0823*100

= 8.23%.

In case of any query, kindly comment on the solution

jeff jeffy answered 1 year ago

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