The market price of a semi-annual pay bond is $981.79. It has10.00 years to maturity...

The market price of a semi-annual pay bond is $981.79. It has 10.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the effective annual yield?

Solutions

Expert Solution

Par value (FV) = $1,000

Annual coupon rate = 7%, Semiannual coupon rate = 7 / 2 = 3.5%

Annual coupon payment (PMT) = 1000 * 7% = $70, Semiannual coupon payment = 70/ 2 = $35

Present value (PV) = $981.79

Period (NPER) = 10 years, Semiannual = 10 * 2 = 20

To compute effective annual yield, we have to use RATE function in excel:

FV	1,000
PV	-981.79
PMT	35
NPER	20
Semiannual yield	3.6296%
Annual yield	7.2593%
Effective annual yield	7.3910%

Therefore effective annual yield will be 7.3910%

Working

jeff jeffy answered 2 years ago

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