Question

The market price of a semi-annual pay bond is $990.01. It has 12.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the effective annual yield?

Answer 1

7.12%

Step-by-step explanation:

The actual return that an investor earn on a bond until its maturity is called the Yield to maturity. It is a long term return which is expressed in annual rate.

According to given data

Face value of the Bond is $1,000

Coupon Payment = C = $1,000 x 7% = $70 annually = $35 semiannually

Price of the Bond = P = $990.01

Numbers of period = n = 12 years x 2 = 24 periods

Use Following Formula to calculate YTM

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [ $35 + ( $1,000 - $990.01 ) / 24 ] / [ ($1,000 + $990.01 ) / 2 ]

Yield to maturity = $35.416 / $995.005 = 0.0356

Yield to maturity = 3.56% semiannually OR 7.12% annually

Answer 2

The answer is 7.12percent

Step-by-step explanation:

Annual yield is also the same as Yield-to-Maturity which is the rate of return as investor of a bond is expecting to earn.

N(Number of years)= 24 years (12x 2)

I/Y(Yield to Maturity) =?

PV(Present Value) = $990.01

PMT(Payment) = 3.5 % of $1,000(4.6%/2) = $35

FV(Future value) = $1,000

Using Financial calculator:

The yield to maturity is

3.56(semi annual)

Annual yield to maturity is 3.56 x 2

7.12percent