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Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at...

Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at a rate of 5.375 percent. If these bonds have a market price of $982.63, what yield to maturity and effective annual yield can she expect to earn? (Round answer to 2 decimal places, e.g. 15.25%.) Yield to maturity % Effective annual yield %

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Answer #1

In this question, we need to calculate the YTM of the bond. Exact YTM calculation requires use of Excel ro Financial calculator. For manual calculation, we can only calculate approx YTM.

For our question, C = 5.375% * $1000/2 = $26.875 (semi-annual), F = $1000, P = $982.63, n = 3 year --> 6 semi-annual periods

Approx YTM = 29.77/991.315 = 3.00% --> Semi-annual

Annual YTM = 3% * 2 = 6% --> Annual YTM

Effective Annual Yield = (1 + 3%)2 - 1 = 6.09% --> Effective Annual Yield

Excel calculation:

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