Question

Cullumber Corp. has five-year semi-annual bonds outstanding that pay a coupon rate of 8.4 percent, these bonds are priced at $1,065.16. (Round answers to 2 decimal places, e.g. 15.25%.)

What is the yield to maturity on these bonds?

Yield to maturity %

Assume semiannual coupon payments.

What is the effective annual yield?

Effective annual yield%

Answer #1

Given about Cullumber Corp's bond,

Years to maturity = 5 years

coupon rate = 8.4% paid semiannually

Current price = $1065.16

Face value = $1000

So, semiannual coupon payment = (8.4%/2) of 1000 = $42

Yield to maturity on the bond can be calculated on financial calculator using following values:

FV = 1000

PMT = 42

N = 2*5 = 10

PV = -1065.16

compute for I/Y, we get I/Y = 3.42

So, Semiannual Yield on the bond = 3.42%

So, Yield to maturity = 2*3.42 = 6.84%

Effective annual rate = (1 + semiannual yield)^2 - 1 = (1+0.0342)^2 - 1 = 6.96%

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