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3 May, 05:17

The market price of a semi-annual pay bond is $990.01. It has 12.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the effective annual yield?

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  1. 3 May, 05:42
    0
    The answer is 7.12percent

    Explanation:

    Annual yield is also the same as Yield-to-Maturity which is the rate of return as investor of a bond is expecting to earn.

    N (Number of years) = 24 years (12x 2)

    I/Y (Yield to Maturity) = ?

    PV (Present Value) = $990.01

    PMT (Payment) = 3.5 % of $1,000 (4.6%/2) = $35

    FV (Future value) = $1,000

    Using Financial calculator:

    The yield to maturity is

    3.56 (semi annual)

    Annual yield to maturity is 3.56 x 2

    7.12percent
  2. 3 May, 06:26
    0
    7.12%

    Explanation:

    The actual return that an investor earn on a bond until its maturity is called the Yield to maturity. It is a long term return which is expressed in annual rate.

    According to given data

    Face value of the Bond is $1,000

    Coupon Payment = C = $1,000 x 7% = $70 annually = $35 semiannually

    Price of the Bond = P = $990.01

    Numbers of period = n = 12 years x 2 = 24 periods

    Use Following Formula to calculate YTM

    Yield to maturity = [ C + (F - P) / n ] / [ (F + P) / 2 ]

    Yield to maturity = [ $35 + ($1,000 - $990.01) / 24 ] / [ ($1,000 + $990.01) / 2 ]

    Yield to maturity = $35.416 / $995.005 = 0.0356

    Yield to maturity = 3.56% semiannually OR 7.12% annually
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