Question

Bart Software has 9 percent coupon bonds on the market with 25 years to maturity. The bonds make semiannual payments and currently sell for 111.75 percent of par. a. What is the current yield on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the effective annual yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield Yield to maturity Effective annual yield

Answer 1

a.Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

   = $45*2/ $1,117.50

= $90/ $1,117.50

   = 0.0805*100

   = 8.0537% 8.05%.

b.The yield to maturity is computed by entering the below in a financial calculator:

FV= 1,000

PV= -1,117.50

PMT= 45

N= 50

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.9571.

Therefore, the yield to maturity is 3.9571%*2= 7.9141%$\rightarrow$7.91%.

c. The effective annual yield is calculated using the below formula:

Effective annual yield= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

effective annual yield = (1+0.07914/2)^2-1

= 1.0807-1

   = 0.0807*100= 8.0707%$\rightarrow$ 8.07%.

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