Question

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Cullumber, Inc., has bonds outstanding that will mature in 8 years. The bonds have a face...

Cullumber, Inc., has bonds outstanding that will mature in 8 years. The bonds have a face value of $1,000. These bonds pay interest semiannually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $871.92, what is the yield to maturity that an investor who buys them today can expect to earn? (Round answer to 3 decimal place, e.g. 5.275%.) Yield to maturity % What is the effective annual yield? (Round answer to 3 decimal places, e.g. 5.275%.) Effective annual yield %

Expert Solution

Information provided:

Face value= future value= $1,000

Time= 8 years*2= 16 semi-annual periods

Coupon rate= 4.60%/2= 2.30%

Coupon payment= 0.0230*1,000= $23

Current price= present value= $871.92

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

FV= 1,000

PMT= 23

N= 16

PV= -871.92

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

The value obtained is 3.3469.

Therefore, the yield to maturity is 3.3469%*2= 6.6938% 6.694%.

b. 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+ 0.0669/2)^2 – 1

= 1.0680 – 1

= 0.0680*100

= 6.802%

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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