Question

Oriole, Inc., has four-year bonds outstanding that pay a coupon rate of 6.20 percent and make coupon payments semiannually. If these bonds are currently selling at $920.89.

What is the yield to maturity that an investor can expect to earn on these bonds? (Round answer to 1 decimal place, e.g. 15.2%.)

Yield to maturity

%

What is the effective annual yield? (Round answer to 1 decimal place, e.g. 15.2%.)

Effective annual yield

%

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Answer 1

Information provided:

Face value= future value= $1,000

Market price= present value= $920.89

Time= 4 years*2= 8 semi-annual periods

Coupon rate= 6.2%/2= 3.10%

Coupon payment= 0.031*$1,000= $31 per semi-annual period

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

FV= 1,000

PV= -920.89

N= 8

PMT= 31

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

The value obtained is 4.2891.

Therefore, the yield to maturity is 4.2891%*2= 8.5781% 8.6%.

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+0.085781/2)^2-1

                                   = 1.0876-1

= 0.0876*100= 8.7621% 8.8%.

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