Question

A bond with a coupon rate of 5.76 percent and semiannual coupon payments matures in 23 years. The YTM is 6.82 percent. What is the effective annual yield

Answer 1

The answer is 6.94%

Step-by-step explanation:

Semiannual coupon payment makes payment twice in a year.

The effective rate is the real return on any interest-paying investment(e.g bonds) when the effects of compounding over time are taken into account

Effective rate = (1 + YTM/n)^n - 1

YTM is 6.82 percent

n is 2( since it s a semiannual)

Effective rate = (1 + 0.0682/2)^2 − 1 =

(1 + 0.0341) ^2 - 1

1.0341^2 - 1

1.0694 - 1

0.694

Expressed as a percentage:

=6.94%