Question

Workman Software has 10.0 percent coupon bonds on the market with 15 years to maturity. The bonds make semiannual payments and currently sell for 138.5 percent of par.

a.	What is the current yield on the bonds?

b.	The YTM?

c.	The effective annual yield?

Answer 1

Part A: Current Yield:

Current Yield = Annual coupon Payment/Current Selling Price*100 = (1000*10%)/1385*100 = 7.22%

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Part B:

Nper = 15*2 = 30 (indicates the period over which interest payments are made)

PMT = 1000*10%*1/2 = 50 (indicates semi-annual interest payment)

PV = 1000*138.5% = 1385 (indicates the current selling price)

FV = 1000 (indicates the face value of bonds)

Rate = ? (indicates YTM)

YTM = Rate(Nper,PMT,PV,FV)*2 = Rate(30,50,-1385,1000)*2 = 6.057%

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Part C:

Effective Annual Yield = (1+YTM/2)^2 -1 = (1+6.057%/2)^2 - 1 = 6.15%

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