Question

Wildhorse, Inc., has four-year bonds outstanding that pay a coupon rate of 6.90 percent and make coupon payments semiannually. If these bonds are currently selling at $917.89.

What is the yield to maturity that an investor can expect to earn on these bonds? (Round answer to 1 decimal place, e.g. 15.2%.)

Yield to maturity

%

What is the effective annual yield? (Round answer to 1 decimal place, e.g. 15.2%.)

Effective annual yield

Answer 1

1.Information provided:

Face value= future value= $1,000

Market price= present value= $917.89

Time= 4 years*2 = 8 semi-annual periods

Coupon rate= 6.90%/2 = 3.45%

Coupon payment= 0.0345*$1,000= $34.50

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

FV= 1,000

PV= -917.89

N= 8

PMT= 34.50

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

The value obtained is 4.7053

Therefore, the yield to maturity is 4.7053%*2 = 9.4%.

2.The annual effective rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+ 0.094107/2)^2 - 1

        = 1.032989-1

        = 0.032989*100

= 3.30%

Therefore, the effective annual rate is 3.3%.