Question

williams software has 6.4 percent coupon bonds on the market with 18 years to maturity. the bonds make semiannual payments and currently sell for 106.32 percent of par. what is the current yield on the bonds? the ytm? the effective annual yield?

Answer 1

The current yield for Williams Software's 6.4% bond selling at 106.32 percent of par is 6.02%. The Yield to Maturity (YTM) and effective annual yield would require more complex calculations considering time value of money and compounding periods.

Step-by-step explanation:

The current yield on a bond is the annual interest payment divided by the current market price of the bond. For Williams Software's bond, which has a 6.4% coupon rate and is selling for 106.32 percent of par, the current yield would be calculated as follows:

(0.064 * $1,000) / ($1,063.20) = $64 / $1,063.20 = 0.0602 or 6.02%.

Yield to maturity (YTM) and effective annual yield are more complex to calculate as they take into account the time value of money, requiring a financial calculator or bond yield formula. However, YTM is a bond's internal rate of return if held to maturity, taking into account all future coupon payments and the difference between its market price and its face value. The effective annual yield adjusts the YTM for the number of compounding periods per year.