Question

Oak Bay Software has 9.7% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 107.3% of par.

What is the YTM? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

What is the effective annual yield? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Answer 1

Given,

Par value = $1000

Coupon rate = 9.7%

Years to maturity = 18 years

Current price = $1000 x 107.3% = $1073

Solution :-

Semi annual coupon payment = $1000 x 9.7% x 6/12 = $48.50

Semi annual periods = 18 years x 2 = 36

So,

FV = 1000

PV = -1073

NPER = 36

PMT = 48.50

YTM = 4.44% x 2 = 8.88%

Effective annual yield = (1 + semi annual yield to maturity)² - 1

= (1 + 0.0444)² - 1

= (1.0444)² - 1

= 1.0908 - 1 = 0.0908 or 9.08%