Answer:
a.
7.85%
b.
7.78%
c.
8.58%
Step-by-step explanation:
a.
Current yield is the ratio of coupon payment of a bond to its current market price. It is calculated by using coupon payment and the current market value of the bond.
Coupon payment = $1,000 x 8.4% = $84 annually
Market Price = $1,000 x 107% = $1,070
Formula for Current yield is as follow
Current Yield = Annual Coupon Payment / Current Market Price
Current Yield = $84 / $1,070
Current Yield =7.85%
b.
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.
Assuming the face value of the bond is $1,000.
Coupon payment = $1,000 x 8.4% = $84 annually = $42 semiannually
Market Price = $1,000 x 107% = $1,070
Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]
Yield to maturity = [ 42 + ( $1,000 - $1070 ) / 40 ] / [ ( $1,000 + $1,070 ) / 2 ]
Yield to maturity = 40.25 / $1,035 = 0.0389 = 3.89% Semiannually = 7.78% annually
c.
Formula for effective yield is as follow
Effective yield = [1 + (r/n)]^n – 1
Effective yield = [1 + (8.4%/2)]^2 – 1
Effective yield = 8.58%