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

Answer 1

The bond's effective annual yield can be calculated using the formula (1 + Semi-Annual Yield)^2 - 1. Plugging in the values, we get an effective annual yield of 12.36%.

Step-by-step explanation:

The effective annual yield of a bond can be calculated using the formula:

Effective Annual Yield = (1 + Semi-Annual Yield)^2 - 1

Given that the bond in question has a semi-annual coupon rate of 8%, we can calculate the semi-annual yield using the formula:

Semi-Annual Yield = Coupon Payment / Bond Price

Plugging in the values, we get:

Semi-Annual Yield = 80 / 1166.62 = 0.0685

Using the formula for the effective annual yield, we can calculate:

Effective Annual Yield = (1 + 0.0685)^2 - 1 = 0.1236 = 12.36%

Therefore, the bond's effective annual yield is 12.36%, which corresponds to option (a).