Question

The market price of a semi-annual pay bond is $985.72. It has 17.00 years to maturity and a coupon rate of 6.00%. Par value is $1,000. What is the effective annual yield?

Answer Format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

Future value= $1,000

Present value= $985.72

Time= 17 years*2= 34 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30.

The yield to maturity is calculated using a financial calculator.

Enter the below in a financial calculator:

FV= 1,000; PV= -985.72; N= 34; PMT= 30

Press CPT and PMT to calculate the yield to maturity.

The yield to maturity is 3.07% per semi-annual period and 6.14% annually.

Effective annual yield is calculated using the below formula:

= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAY= (1+0.0614/2)^2-1

        = 1.0623-1

        = 0.0623*100= 6.2342%

Therefore, the effective annual yield is 6.2342%.