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1. What is the effective annual yield of a bond that promised an annual yield of...

1. What is the effective annual yield of a bond that promised an annual yield of 7.5% if this bond pays coupons twice a year?

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Answer #1

Effective annual yield is the yield, what investor would receive if semi annual coupons(or any part of year) reinvested at normal annual yield.

Suppose, Face value of Bond = $ 1

annual yield = 7.5%

thus, semi annual yield (i) = 7.5%/2 = 3.75%

and semi annual coupon payments(n) = 2

Therefore, Effective annual yield in above case would be 7.640625%

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