Question

A bond has a 6.5% yield to maturity and coupons paid semiannually. What is the bond's effective annual yield (EAY)?

Answer 1

The effective annual yield (EAY) of a bond with a 6.5% yield to maturity and coupons paid semiannually can be calculated using the formula: Divide the yield to maturity by the number of coupon periods per year to obtain the semiannual yield. Add 1 to the semiannual yield and raise it to the power of the number of coupon periods per year. Subtract 1 from the result and multiply by 100 to get the effective annual yield.

Step-by-step explanation:

The effective annual yield (EAY) of a bond with a 6.5% yield to maturity and coupons paid semiannually can be calculated using the formula:

1. Divide the yield to maturity by the number of coupon periods per year to obtain the semiannual yield. In this case, 6.5% divided by 2 is 3.25%.
2. Add 1 to the semiannual yield and raise it to the power of the number of coupon periods per year. In this case, (1 + 0.0325)^2 = 1.0677625.
3. Subtract 1 from the result and multiply by 100 to get the effective annual yield: (1.0677625 - 1) * 100 = 6.77625%.