Question

Workman Software has 6.6 percent coupon bonds on the market with 8 years to maturity. The bonds make semiannual payments and currently sell for 83.6 percent of par.

a.	What is the current yield on the bonds?
	8.79% 8.29% 0.18% 7.89%

b.	The YTM?
	7.10% 4.79% 9.77% 9.59%

c.	The effective annual yield?
	10.31% 0.08% 9.56% 9.82%

Answer 1

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Answer:

Face Value = $1,000

Current Price = 83.6% * $1,000
Current Price = $836

Annual Coupon Rate = 6.6%
Semiannual Coupon Rate = 3.3%
Semiannual Coupon = 3.3% * $1,000
Semiannual Coupon = $33

Answer a.

Current Yield = Annual Coupon / Current Price
Current Yield = $66 / $836
Current Yield = 7.99%

Answer b.

Face Value = $1,000
Current Price = $836
Semiannual Coupon = $33

Time to Maturity = 8 years
Semiannual Period to Maturity = 16

Let semiannual YTM be i%

Using financial calculator:
N = 40
PV = -1073
PMT = 33
FV = 1000

I = 4.791%

Annual YTM = 2 * 4.791%
Annual YTM = 9.59%

Answer c.

Effective Annual Yield = (1 + Semiannual YTM)^2 - 1
Effective Annual Yield = (1 + 0.04791)^2 - 1
Effective Annual Yield = 9.82%