Question

Oak Bay Software has 10.0% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 107.6% of par.

 

What is the YTM? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

 

YTM %

 

What is the effective annual yield? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

 

Effective annual yield %

Answer 1

Answers

Here, Annual Coupon rate = 10%

Semi -Annual Coupon rate = 10%/2 = 5%

Term to maturity = 18 years 

Semi -Annual Periods = 18 years * 2 = 36

Let the Par Value of the Bond = $1000

Current Selling Price of Bond = 107.6% of Par Value = $1076

Part a

Using the Formula of Yield to Maturity 

Semi - Annual Yield to Maturity is 4.61%

Annual Yield to Maturity is 4.61%*2 = 9.22%

Part b 

Here,

Number of Compounding Periods = 2(As semi -annual periods means 6 months)

Nominal Interest rate = Annual Yield to Maturity = 9.22%

Using the Effective Annual Rate Formula

Answer: Part a Yield to Maturity of the Bond is 9.22%

             Part b  Effective Annual Yield is 9.43%