Question

Use the following information to answer the next three questions. Consider a bond that currently sells for $1,023.51, its annual coupon rate is 11.64%, and it matures in 13 years. Interest is paid semiannually.

What is the current yield on this bond?

What is the yield to maturity on this bond?

What is the bond's effective annual yield to maturity?

show work please

Answer 1

1. Current yield=annual coupon/Current price

annual coupon payment=(11.64%*$1000)=$116.4

Current yield=$116.4/$1023.51=11.37%

2. The yield to maturity can be found using RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

Here, the payments are semi-annual

nper=number of periods=2*13=26

pmt=semi-annual coupon payment=$116.4/2=58.2

pv=$1023.51

fv=$1000

=RATE(26,58.2,-1023.51,1000,0)

RATE=5.65%

Semi-annual rate=5.65%

Anual yield to maturity=2*5.65%=11.29%

3. Effective annual yield to maturity=((1+(YTM/2))^(2*1))-1 ( because payments are semi-annual)

=((1+(11.29%/2))^2)-1

=11.61%