Question

Workman Software has 6.6 percent coupon bonds on the market with 11 years to maturity. The bonds make semiannual payments and currently sell for 87.8 percent of par. a. What is the current yield on the bonds? b. The YTM? c. The effective annual yield?

Answer 1

Answer : Calculation of Current Yield = (Coupon / Market Price ) *100

Coupon = $1,000 * 6.6%

= 66

Semi annual Coupon = 66 / 2 = 33

Current Market Price = 1000 * 87.8%

= $878

Current Yield = (33 / 878) * 100

= 3.75854 (semi annual)

= 7.52% (Annual)

Calculation of Yield to Maturity using Financial Calculator

= Rate(nper,pmt,pv,fv)

where nper =11*2 = 22

pmt = semiannual coupon i.e 33

pv = current market Price = - 878

fv= face value = $1000

=Rate(22,33,-878,1000)

=4.16% or 8.32%

Calculation of Effective Yield

Effective yield = {1+ (i/n)n} - 1

where i = Coupon rate i.e.6.6% or 0.066

n = number of compounding period i.e 2

Effective Yield = {1 + (0.066 / 2)2} - 1

= {1.033}2 - 1

= 1.067089 - 1

= 0.067089 or 6.71%