Question

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Novak Limited has bonds outstanding that will mature in 7 years. The bonds have a face...

Novak Limited has bonds outstanding that will mature in 7 years. The bonds have a face value of $1,000. The bonds pay interest semi-annually and have a coupon rate of 4.8 percent. If the bonds are currently selling at $899.96, what is the yield to maturity that an investor who buys them today can expect to earn?

YTM?

Effective annual yield?

Expert Solution

- Face Value of Bond = $1000

Semi-annual Coupon payment = $1000*4.8%*1/2 = $24

No of coupon Payments = 7 years*2 = 14

Current price = $899.96

Calculating the Semi-annual YTM using Excel "rate" function:-

Semi-annual YTM = 3.3041%

Annual YTM = 3.3041%*2 = 6.61%

So, the yield to maturity is 6.61%

- Calculating Effective Annual Yield(EAY):-

EAY = (1+Semi-annual YTM)^2 - 1

EAY = (1+0.033041)^2 - 1

EAY = 6.72%

So, Effective annual yield is 6.72%

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jeff jeffy answered 2 years ago

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