Question

The market price of a semi-annual pay bond is $984.54. It has 17.00 years to maturity and a coupon rate of 6.00%. Par value is $1,000. What is the effective annual yield?

Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

Sol:

Par value (FV) = $1,000

Present value (PV) = $984.54

Coupon rate = 6%, Semiannual = 6/2 = 3%

Semiannual coupon payment (PMT) = 1000 x 3% = $30

Period (NPER) = 17 years, Semiannual = 17 x 2 = 34

To determine Effective annual yield, we can use RATE function in excel to get semiannual Yield to maturity and then convert it into Effective annual yield.

FV	1000
PV	-984.54
NPER	34
PMT	30
Yield to Maturity (Semiannual)	3.0739%
Effective annual yield	6.2424%

Therefore effective annual yield of the Bond is 6.2424%

Working