Question

Workman Software has 10 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 107.8 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 b. YTM c. Effective annual yield

Answer 1

a)

Assuming price to be $1,000

Annual coupon = 10% of 1000 = 100

Price = 107.8% of 1000 = 1,078

Current yield = (Annual coupon / price) * 100

Current yield = (100 /  1,078) * 100

Current yield = 9.28%

b)

Semi annual coupon = 100 / 2 = 50

Number of periods = 19 * 2 = 38

YTM = 9.13%

Keys to use in a finnacial calculator:

2nd P/Y 2

FV 1000

PV -1,078

PMT 50

N 38

CPT I/Y

3)

Effective annual yield = (1 + YTM/n)n - 1

Effective annual yield = (1 + 0.0913/2)2 - 1

Effective annual yield = (1 + 0.04565)2 - 1

Effective annual yield = 1.0934 - 1

Effective annual yield = 0.0934 or 9.34%