Question

One More Time Software has 9.0 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 113.0 percent of par.

Required:

(a)	What is the current yield on the bonds?
	(Click to select)  0.18%  0.08%  8.36%  7.96%  8.86%

(b)	The YTM?
	(Click to select)  6.52%  6.83%  3.32%  6.65%  9.50%

(c)	The effective annual yield?
	(Click to select)  6.76%  0.08%  6.62%  6.42%  7.10%

Answer 1

(a)-Current Yield on the Bond

Current Yield on the Bond = [Annual Coupon amount / Market Price of the Bond] x 100

= [($1,000 x 9.00%) / ($1,000 x 113%)] x 100

= [$90.00 / $1,130.00] x 100

= 7.96%

(b)- Yield to maturity of (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00% x ½]	PMT	45
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [7 Years x 2]	N	14
Bond Price [-$1,000 x 113%]	PV	-1,130

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 6.65%

“Hence, the Yield to maturity of (YTM) of the Bond = 6.65%”

(c)-Effective Annual Yield

Number of Compounding per year = 2 (Since, the compounding is done semi-annually)

Therefore, the Effective Annual Yield = [(1 + (YTM/2)]² – 1

= [(1 + (0.0665/2)] ² – 1

= [1 + 0.03325]² – 1

= [1.03325] ² – 1

= 1.067605563 – 1

= 0.067605563 or

= 6.76% (Rounded to 2 decimal place)

“Hence, the Effective Annual Yield on the Bond will be 6.76%”