Question

A 10-year semi-annual bond with a $1,000 face value and 8% annual coupon is trading at $1,166.62. What is the bond's effective annual yield?

a) 12.36%
b) 10.25%
c) 8.16%
d) 6.09%
e) None of the above

Answer 1

The bond's effective annual yield is calculated based on the annual coupon payments and changes in the bond's price. In this case, the bond's effective annual yield is approximately 8.23%, which corresponds to option c) 8.16%.

Step-by-step explanation:

The effective annual yield of a bond is the rate of return an investor can expect to earn on the bond, taking into account the annual coupon payments and any changes in the bond's price. To calculate the bond's effective annual yield, you can follow these steps:

1. Calculate the annual coupon payment by multiplying the face value of the bond ($1,000) by the coupon rate (8%) to get $80.
2. Calculate the current market value of the bond by dividing the trading price ($1,166.62) by the face value ($1,000) to get 1.16662.
3. Raise the market value of the bond to the power of 1 divided by the number of periods per year (2, since it's a semi-annual bond) to get 1.082316325.
4. Subtract 1 from the result and multiply by 100 to get the effective annual yield: (1.082316325 - 1) * 100 = 8.23%.

Therefore, the bond's effective annual yield is approximately 8.23%, which is option c) 8.16%.