Question

A 10-year maturity bond with par value $1,000 makes semiannual coupon payments at a coupon rate of 6%. a. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is $940. (Round your intermediate calculations to 4 decimal places. Round your answers to 2 decimal places.)

Answer 1

a. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is $940.

the yield to maturity of the bond is:

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2] = {60 + [(1,000 - 940)/10]} / [(1,000 + 940)/2] = 66 / 970 = 0.06804 = 6.8%

the bond equivalent yield is:

BEY = 2 x [√(1 + YTM) - 1] = 2 x [(√1 + YTM) - 1] = 2 x [√1.068 - 1] = 2 x [(√1 + YTM) - 1] = 0.06688 = 6.69%