Question

One More Time Software has 10.8 percent coupon rate (APR) bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 115.9 percent of par.

Required:

(a)	What is the current yield on the bonds?
	(Click to select)   0.10%   0.19%   9.32%   10.28%   9.78%

(b)	What is the YTM as an APR?
	(Click to select)   7.67%   7.98%   7.80%   11.30%   3.90%

(c)	What is the YTM as an effective annual rate (EAR)? Note: use the ICONV to convert an APR into an EAR.
	(Click to select)   7.55%   7.77%   0.09%   7.95%   8.35%

Answer 1

Let par value of Bond = $ 100

Computation of Current Yield:

Current Price = 115.9% of par

Current Price = 115.9% * $ 100 = $ 115.9

Coupon Rate = 10.8% = $ 100*10.8% = $ 10.8

Current Yield = Coupon Payment / Current Price

Current Yield = $ 10.8 / $ 115.9

Current Yield = 9.32%

(b) Answer: 7.8% Computation of YTM(r):

Price of Bond = Present Value of all future expected Cashflows

Price of Bond = Present Value of Coupon Payments and Redemption Amount

Price of Bond = [$10.8 /2* PVAF((r/2)%, (7*2) periods)] + [$ 100 * PV((r/2)%, (7*2) period)]

$ 115.9 = [$ 5.4* PVAF((r/2)%, 14 periods)] + [$ 100 * PV((r/2)%, 14 period)]

Given Options		PV		PVAF
r	1+(r/2)	(1+r)^-n	1- [(1+r)^-n]	[1- [(1+r)^-n]] /r	Interest	PV of Interest	Redemption Value	PV of Redemption Value	Price of Bond
7.67%	1.0384	0.5905	0.4095	10.68	5.4	57.661	100	59.05	116.711
7.98%	1.0399	0.5783	0.4217	10.57	5.4	57.0722	100	57.83	114.902
7.80%	1.0390	0.5853	0.4147	10.63	5.4	57.42	100	58.53	115.95
11.30%	1.0565	0.4633	0.5367	9.50	5.4	51.2952	100	46.33	97.6252
3.90%	1.0195	0.7631	0.2369	12.15	5.4	65.6031	100	76.31	141.913

(c) Answer: 7.9%

Computation of Effective Rate of Interest

Effective Rate of Interest = (1+i)^n - 1

Effective Rate of Interest = (1+(0.078/2))^2 - 1

Effective Rate of Interest = 1.0795 - 1

Effective Rate of Interest = 7.95%