Question

Question 10 5 pts Eagle Industries' bonds have a 10-year maturity and a 7.65% 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. MacBook Air

Answer 1

The Yield to maturity (YTM) of the Bond

-If the Bond is selling at Par, then the Yield to maturity (YTM) of the Bond shall be equal to the coupon rate of the Bond.

-Therefore, the Yield to maturity (YTM) of the Bond will be 7.65%.

Effective annual rate (EFF)

Number of Compounding per year = 2 (Since, the compounding is done semi-annually)

Therefore, the Effective Annual Yield = [(1 + (YTM/2)]2 – 1

= [(1 + (0.0765/2)] 2 – 1

= [1 + 0.03825]2 – 1

= [1.03825] 2 – 1

= 1.077963063 – 1

= 0.077963063 or

= 7.80% (Rounded to 2 decimal place)

“Hence, the Effective annual rate (EFF) will be 7.80%”