Question

Bourdon Software has 7.3 percent coupon bonds on the market with 17 years to maturity. The bonds make semiannual payments and currently sell for 92 percent of par.

What is the effective annual yield?

(Enter your answer as a percentage, omit the "%" sign in your response, and enter your answer with two decimal places. For example, 1.214% should be entered as 1.21.)

Answer 1

FV = Future Value = $ 1,000 (assuming face value of bond is $ 1,000)

N = Term = 17 x 2 (semi-annual coupon) = 34

PV = Present Value or Price of Bond =92% of Face Value = 92% x 1000 = 920

PMT = Coupon = 7.3% x 1000 /2 = 36.5

I/Y = Yield Semi-annual = ?

Using financial calculator BA II Plus – Texas Instrument:

Input values in following sequence (all inflows in negative eg. FV and PMT):

N = 34 ; PMT = -36.5 ; PV = 920 ; FV = -1000 ; CPT > I/Y

Result: I/Y = 4.089718% (semi-annual yield)

Final Answer converting semi-annual rate in annual rate:

I/Y x 2 = 4.089718% x 2 = 8.179435%

Rounding it to two decimal places and removing % sign

Effective annual yield = =(1+4.089718%)^2-1 = 8.35%