Question

Bourdon Software has 6.7 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par.

What is the effective annual yield? (round 2 decimal places)

Answer 1

Assuming face value to be $1000

Price = (105 / 100) * 100 = $1050

Number of periods = 18 * 2 = 36

Semi annual coupon = [(6.7 / 100) * 1000] / 2 = 33.5

Yield to maturity = 6.2339%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PV -1050

PMT 33.5

N 36

CPT I/Y

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

Effective annual yield = (1 + 0.062339/2)^2 - 1

Effective annual yield = (1 + 0.03117)^2 - 1

Effective annual yield = 1.0633 - 1

Effective annual yield = 0.0633 or 6.33%