Question

Hacker Software has 10.6 percent coupon bonds on the market with 17 years to maturity. The bonds make semiannual payments and currently sell for 108.1 percent of par.

What is the current yield on the bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the effective annual yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

current yield = annual coupon payment / current bond price

current yield = 10.6 / 108.1

current yield = 9.81%

YTM is calculated using RATE function in Excel with these inputs :

nper = 17*2 (17 years to maturity with 2 semiannual coupon payments each year)

pmt = 10.6 / 2 (semiannual coupon payment = annual coupon payment / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -108.1 (current bond price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 100 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE is the semiannual YTM. To calculate the annual YTM, we multiply by 2.

Annual YTM is 9.62%

\

EAY = (1 + (YTM/2))² - 1

EAY = (1 + (9.62%/2))² - 1

EAY = 9.85%