In: Finance
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?
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