Question

Three years ago you purchased a 11?% coupon bond that pays semiannual coupon payments for ?$963. What would be your bond equivalent yield if you sold the bond for current market price of ?$1057??

Your bond equivalent? yield, if you sold the bond for current market? price, is ------?%. ?(Round to two decimal? places.)

Answer 1

To calculate BEY we need to find per period yield first.

Remember, BEY = Yield per period * number of periods in a year

Since it is a semi annual bond , therefore, number of periods in a year = 2

Now, to calculate YTM per period use bond equation :

We need to modify this equation a little bit and that is the trick

Since we bought the bond 3 years back we have to discount all the coupons received till date back to 3 years

also, Face Value now will become the current market price that the bond is trading i.e. $1057

Coupon per period will be = (11% / 2) * 1000 = $55

Now, the equation will modify to :

using MS Excel Goal Seek option we can find YTM per period. Following is the snapshot for the same :

As can be seen YTm per period comes out to be = 7.07%

Therefore, BEY = 7.07% * 2

= 14.15% .......................Answer