Question

The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent. 6.23; 6.36; 6.42 6.23; 6.20; 6.16 6.12; 6.36; 6.42 6.35; 6.39; 6.49 6.35; 6.32; 6.29

Answer 1

Suppose; the par value of bond is $1,000 and the price quote is 99.2. So, the price of bond is $992.00 [$ 1,000 x 99.2%) . The bond is compounded semi-annually with 6.3% coupon rate and matures in 13 years. Calculate the current yield as follows: Curent yield - Coupon payment Price of bond $1,000 x6.3% $992 $63 $992 0.0635 or 6.35%) Therefore, the current yield is 6.35% The years to maturity will be multiplied by 2 and coupon payment will be divided by 2 as the bond is compounded semi-annually. Calculate the semi-annual Yield to Maturity (YTM) for bonds using MS-EXCEL "RA Maturity TE" Function as follows:

Function Arguments RATE Nper 13 2 26 - -31.5 992 1000 - number Pmt 1000 6.3%/2 Pv 992 Fv -1000 Type -0.031957648 Returns the interest rate per period of a loan or an investment. For example, use 6%/4 for quarterly payments at 6% APR. Type is a logical value: payment at the beginning of the period-1; payment at the end of the period = 0 or omitted Formula result- 3.1958% The semi-annual Yield to Maturity (YTM) of bond is 3.1958% Calculate the annual Yield to Maturity (YTM as follows Annual Yield to Maturity (YTM)- Semi-annual Yield to Maturity x2 - 3.1958%x2 - 6.3916% 639%) Therefore, the Annual Yield to Maturity (YTM) is 6.39% Calculate the effective annual yield as follows

Effective annual yield-| | Peiod 6.39%)2 -(1+0.03195)-1 0.0649 or 6.4% Therefore, the effective annual yield is 6.49% Hence, the answer is: 6.35; 6.39; 6.49