Question

A bond with a coupon rate of "5.96" percent and semiannual coupon payments matures in 18 years. The YTM is 6.97 percent. What is the effective annual yield?

Answer 1

Available Options Are:

(A) 7.38%

(B) 5.96%

(C) 6.05%

(D) 7.09%

(E) 6.97%

Answer:

Effective Annual Yield is 7.09%

Step-by-step explanation:

The Effective Annual Yield can be calculated as under:

Effective Annual Yield = (1 + YTM / n)^n - 1

Here,

YTM is 6.97%

n is 12/6 for semi annual coupon payments

By putting values, we have:

Effective Annual Yield = (1 + 6.97% / 2)^2 - 1

Effective Annual Yield = (1.03485)^2 - 1 = 0.0709145 = 7.09%