Question

Bart Software has 7.7 percent coupon bonds on the market with 24 years to maturity. The bonds make semiannual payments and currently sell for 108.5 percent of par.

a.	What is the current yield on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the effective annual yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a)

Assuming face value to be $1000

Price = 108.5% of 1000 = 1,085

Annual coupon = 7.7% of 1000 = 77

Current yield = (Annual coupon / price) * 100

Current yield = (77 / 1085) * 100

Current yield = 7.10%

b)

Number of periods = 24 * 2 = 48

Semi annual coupon = 77 / 2 = 38.5

YTM = 6.97%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -1,085

N 48

PMT 38.5

CPT I/Y

c)

Effective annual yield = (1 + YTM/n)^n - 1

Effective annual yield = (1 + 0.0697/2)^2 - 1

Effective annual yield = (1 + 0.03485)^2 - 1

Effective annual yield = 1.0709 - 1

Effective annual yield = 0.0709 or 7.09%