Question

Hacker Software has 9.4 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 107.5 percent of par.

What is the current yield on the bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Current yield

8.744%

What is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

YTM

8.59%

What is the effective annual yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual yield

%

Answer 1

Future value= $1,000

Current value= 107.5%*1,000= $1075

Coupon rate= 9.40%/2= 4.70%

Coupon payment= 0.0470*1,000= $47

Time= 19 years*2= 38 semi-annual periods

a.Current Yield= Annual interest/Current price

                         = $94/ $1075 = 8.74%.

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

FV= 1,000; PV= -1075; PMT= 47; N= 38

Press CPT and I/Y to calculate the yield to maturity

The yield to maturity is 4.29%*2= 8.60%.

c.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+0.086/2)^2-1

                                          = 1.0878-1

                                       = 0.0878*100= 8.78%.