Trevor Price bought 10-year bonds issued by Harvest Foods five years ago for $95

Question

Trevor Price bought 10-year bonds issued by Harvest Foods five years ago for $954.76. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,079.80, what is the yield that Trevor would earn by selling the bonds today?

ok I'm using a financial calculator but for some reason I'm not getting the answer right
here's what I'm doing;


N=5*2--> 10
PV= -1079.80
FV= 1000
PMT= 0.084/2*1000---> 42
i=??
I get i then multiply by 2 to get annual
then I find EAY= (1+ i/2)^2 -1

So Im not using the initial purchase amount, I just dont know where to use that

Explanation / Answer

Hi Nelineh,

Your approach is correct but you are using the wrong values for PV and FV. PV should be 954.76 and FV should be 1079.80. This is because we are not calculating yield to maturity but yield to sale of bond which is happening now (5 years after purchase of bond).

So, using N = 5*2 = 10

PV = 954.76

FV = 1079.80

PMT = 0.084/2*1000 = 42

we get i = 5.42%

So effective annual yield = (1+5.42%)^2 - 1 = 11.13%

And nominal annual yield = 5.42% * 2 = 10.84%

Answer: Effective annual yield = 11.13% and nominal annual yield = 10.84%

Hope this helped ! Let me know in case of any queries.

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