Question

One More Time Software has 8.4 percent coupon bonds on the market with 16 years to maturity. The bonds make semiannual payments and currently sell for 81.5 percent of par.

(a) What is the current yield on the bonds?

(b) The YTM?

(c) The effective annual yield?

Answer 1

a. Current Yield on Bonds

Current Yield = Annual Coupon / Market Price

Current Yield = $42 * 2 / $815

Current Yield = $42 * 2 / $815 = 10.31%

b. Computation of YTM

Semi Annual YTM = [Coupon + (Face Value - Market Price) / Years] / [(Face Value + Market Value) / 2 ]

Semi Annual YTM = [$42 + ($1000 - $815) / 16] / [($1000 + $815) / 2 ]

Semi Annual YTM = [$42 + 11.5625] / 907.5

Semi Annual YTM = [$42 + 11.5625] / 907.5 = 5.90%

Annual YTM = (1 + Semi Annual YTM)^2 - 1

Annual YTM = (1.059)^2 - 1 = 12.15%

c. Effective Annual Yield of Bond

Effective Annual Yield = (1 + 0.42)^2 - 1

Effective Annual Yield = 8.58%