Question

Oak Bay Software has 9.9% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 107.5% of par.

What is the YTM? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) YTM %

What is the effective annual yield? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Effective annual yield %

Answer 1

1)

Assuming face value to be $1000

Price = (107.5 / 100) * 1000 = 1,075

Number of periods = 18 * 2 = 36

Semi annual coupon = [(9.9 / 100) * 1000] / 2 = 49.5

YTM = 9.05%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -1,075

PMT 49.5

N 36

CPT I/Y

2)

Effective annual yield = (1 + Yield to maturity/n)^n - 1

Effective annual yield = (1 + 0.0905/2)^2 - 1

Effective annual yield = (1 + 0.04525)^2 - 1

Effective annual yield = 1.0926 - 1

Effective annual yield = 0.0926 or 9.26%