Question

5 pts Question 10 Eagle Industries' bonds have a 10-year maturity and a 8.30% coupon paid semiannually. They sell at their $1,000 par value, and are not callable. What is the effective annual rate (EFF%) for these bonds? Recall that EFF% - [1 + (Nominal Rate/n)]-1 Your answer should be between 7.20 and 9.12, rounded to 2 decimal places, with no special characters. 5 pts Question 11 Pandora Media plans to issue original issue discount (OID) bonds with a 20-year maturity, $1,000 par value, and initial yield to maturity of 8%. Since these bonds are issued below par, the total yield vam hath annual coupon payments and appreciation. If the bonds are offered at a atenunan rate

Answer 1

Answer to Q#10 (First cum complete question in the list):

When compounded semiannually, effective annual yield rate = (1 + Annual interest rate/2)^-1 as there will be 2 compoundings per year Therefore, 8.30% (Ref: NOTE --> Bond's annual coupon bond is equal to bond's yield to maturity] Annual interest rate (APR) Number of quarters in a year Effective annual yield rate (EFF) 8.47% [((1+8.30%/2)^2) - 1 = ((1+4.15%)^2) - 1 = (1.0415^2) - 1 = 0.0847 = 8.47%] NOTE: --> There is an inverse relationship between bond's coupon rate and yield to maturity (is nothing but the reinvestment rate per period). --> It results inverse relation exists between bond price and bond's reinvestment rate per period too. --> If the yield to maturity is lower than coupon rate, bonds will be issued at premium (market price more than bond's par value) as the bonds will be demanded more among the investors; In the given case, coupon rate is 8% whereas the yield to maturity is 7%. Therefore, bonds will be issued at price higher than bond's par value, that is at premium. --> Bond's yield to maturity is nothing but the market interest rate or expected return on bond by investors. If the yield to maturity is higher than coupon rate, bonds will be issued at discount (market price less than bond's par value) to attract more customers; In the given case, coupon rate is 8% whereas the yield to maturity is 9%. Therefore, bonds will be issued at price less than bond's par value, that is at discount. --> If yield to maturity is equal to coupon rate, bonds will be issued at par obviously as both coupon rate and investor's expected return rate are equal which implies that bond's coupon rate exactly satisfies investors' expected return on such bonds.